Cinema group AMC Entertainment (NYSE: AMC) is undoubtedly the stock of the week. Its share price recently rose to unheard of heights. But it was on what appears to me more speculation than fundamental reasons.
Cinemas are back in business
It is true that cinemas are back in business. In the US, they opened in April and the month after in the UK, where AMC Entertainment owns the Odeon chain. It is also true that forecasts support their recovery.
I have lost count of the number of times I have read the phrase ‘pent-up demand’ in relation to potential spending by consumers. And there is truth to this view, of course. Retail sales volumes were up a whole 9.2% month-on-month in April in the UK, for instance.
It is also true that AMC Entertainment has taken a few steps that caught investor attention. It just launched AMC Connect, which provides special offers to its shareholders, including free popcorn and invites to special screenings.
AMC also raised capital from Mudrick Capital, which invests in distressed companies. This could have potentially improved investor confidence in the stock.
Twist in the AMC Entertainment tale
However, there is a twist in this tale. According to a Bloomberg article, Mudrick Capital has already sold its stake in AMC Entertainment. Further, as its share price reached dizzying heights, the company itself made a statement that its valuations were unrelated to its fundamentals.
I do not need much more insight to know that it is a stock I would like to steer clear of.
I like the Cineworld share more
Instead, if I were really gung-ho on cinema stocks, I would buy Cineworld (LSE: CINE). I know it has its detractors, and for good reason too. The cinema chain’s debt is high, and its business has, of course, been hit badly.
Also, there can be volatility along the way. Coronavirus is still creating uncertainty. It has even created some doubt on whether or not the UK will fully reopen on June 21. Cineworld’s share price is down from its March highs by around 20%, to 95p, making it a penny stock today.
But it has also seen a better than expected reopening in the UK with Peter Rabbit 2. And its share price is still pretty low compared to its pre-pandemic levels. I reckon that it is only a matter of time before it rises now.
Moreover, I would not just consider its recent share price fall in assessing the stock but also take a look at its performance over a longer period. This shows a better picture. It is slightly up from the same time last year and more than four times up from the lows seen during the market crash last year.
My takeaway
To put it briefly, my point is this. Cineworld may have its ups and downs, but that is to be expected when I invest in a stock with a medium-to-long-term time frame in mind. Instead, buying the AMC Entertainment share today feels to me like a gamble, which should not be confused with investing.
