Since the end of January, the AMC (NYSE:AMC) share price has been a hot topic among retail investors across the world. Subject to short squeeze deliberation triggered by the Gamestop saga, retail investors have been banding together against hedge fund short positions.

However, while many investors are hoping a short squeeze could send the AMC share price rocketing, I also like the look of this stock’s long-term position.

AMC short squeeze history

Firstly, let’s clear up exactly what a short squeeze is. In a nutshell, shorting a stock entails borrowing shares from a broker, betting their price will go down. These shares are then returned at the lower share price, and the difference is pocketed as profit. It is usually done by big hedge funds who take out multi-million short share positions.

However, if the price doesn’t go down, these hedge funds find themselves in big trouble. This is because short sellers exit their positions with buy orders. If these are executed at a higher price than they were borrowed for, share prices go through the roof.

In the case of AMC, things kicked off in late January soon after the Gamestop short squeeze. Retail investors quickly noticed 24% of AMC’s floated shares were held in short positions, so targeted it. By the time markets closed on 27 January over 1bn shares had been traded and the share price inflated over 300%!

There is speculation of another short squeeze as over 37.3m of the 490m floated shares are shorted. In addition to this, the AMC share price has been following an extremely bullish trend, up 42% in the past 30 days. This does point towards the possibility of another short squeeze.

AMC share price future

Though a short squeeze may drive up prices in the short run, there are also reasons why I am bullish on AMC’s long-term value. The cinema chain was decimated by Covid-19 closures, driving down revenues. However, the firm reported that as of March 2020, 527 out of its 589 US theatres were back open. This is great news as boosted capacity means revenues will start to increase again.

In Europe, however, only 27% of cinemas were reported open in the firm’s Q1 results. While this may seem bad in the short term, as Covid-19 restrictions ease across the continent, capacity will continue to grow, driving up revenues further.

CEO Adam Aron highlighted that bankruptcy was also now completely off the table, after raising over $917m of new equity and debt capital. This puts AMC in a strong financial position moving forward past the pandemic.

However, with the streaming industry growing at an accelerated rate, cinemas face stiff competition. Streaming subscriber numbers surged 34% in 2020, with a big part of this attributable to the pandemic. The industry is expected to keep growing by over 20% year-on-year, as companies like Netflix and Disney increase in popularity.

What I’m doing now

As a current investor in AMC, I’m trying to look past the short squeeze speculation. I prefer to invest looking at the long-term value of a stock. I like the outlook for AMC as the cinema is finally opening its doors to customers again. The fact bankruptcy is out of the picture now is a plus too. Therefore, I will be holding for the long term.

The post Why I’m looking beyond the short-term AMC share price appeared first on The Twelfth Magpie.

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Dylan Hood owns shares in AMC Entertainment Holdings. The Motley Fool UK owns shares of and has recommended Netflix and Walt Disney. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Now, the hedge funds don’t always get it right. But quite often, they do. Just look at some of the companies that have been shorted heavily by the hedgies in recent years – Carillion, Thomas Cook, Debenhams… all of these companies turned out to be shocking investments.

With that in mind, today I want to warn readers about a well-known FTSE 250 stock that is being heavily shorted right now. Given the high level of short interest, I think investors need to be very careful with this stock.

Tread carefully

The FTSE 250 stock I’m referring to is Cineworld (LSE: CINE), the second-largest cinema operator globally.

This is not the first time I’ve warned about the short interest here. Back in early November, when the stock was trading at around 225p, I warned that 10.1% of its shares were being shorted (I see anything above 7% as risky) and that it was the third most shorted stock in the UK. I saw that as “quite concerning.” Today, the shares change hands for around 190p, meaning they’ve fallen 15% since then.

However, the short situation now looks even worse. According to shorttracker.co.uk, Cineworld is currently the second most shorted stock with 13.6% of its shares being shorted. In other words, the hedgies have upped their stake, despite the fact that the share price has fallen recently. That’s not good.

So, what could it be that the hedge funds don’t like here?

Hedge funds smell blood

Well for starters, the group issued a disappointing trading update in December. Describing the backdrop as “challenging”, the company reported a 9.7% decline in total revenue (and a 12.8% decline in box office revenue) for the period 1 January 2019 to 1 December. It also advised that revenue for the full year is expected to be slightly below the company’s expectations.

Growing debt pile

Second, Cineworld recently announced the acquisition of Canada’s Cineplex for $2.1bn. Now, the FTSE 250 company already had a large chunk of debt on its balance sheet. Recent half-year results showed a net debt-to-adjusted EBITDA ratio (a measure of a company’s ability to pay off its debt) of 3.3 times, which is high. This acquisition, which will be debt-funded, will further increase its leverage. That’s not ideal, particularly when you consider that we are late in the economic cycle. A high level of debt means the company could be extremely vulnerable in the event of a recession.

Netflix threat

Finally, there’s the competition that cinema operators face from Netflix. I see this as a significant long-term threat. Given that a basic monthly subscription to Netflix costs less than £10 (which gets you access to an incredible range of TV shows and movies) versus around £25 to £30 for two movie tickets, the outlook for cinema operators looks challenging, to my mind.

Cineworld shares do look cheap at the moment. Currently, the forward-looking P/E ratio is just eight. However, given the high level of short interest, I think the most sensible move is to steer clear.

The post A FTSE 250 dividend stock I’d definitely steer clear of right now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Netflix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.