AMC: Is a Big Squeeze in the Coming Attractions?

Key Points

• AMC shares gapped up as much as 33% this morning, thanks to recent headlines and a strong operating weekend. 
• AMC is currently dealing with two lawsuits, an annual meeting date and the protested conversion of AMC Preferred Equity Units (APE) to AMC stock.
• Roughly 29% of AMC’s float is in the hands of short sellers, making it one of the top 10 most-shorted U.S. mid-caps.

Could the recent action in AMC Entertainment Holdings Inc. NYSE: AMC stock be a preview of last summer's blockbuster short squeeze?

Nearly eight million moviegoers worldwide visited an AMC Theater over the highly anticipated "Barbenheimer" weekend. It marked the movie chain operator's busiest extended weekend since 2019 and the second-largest food and beverage sales haul ever. With trading volume as strong as theater attendance, AMC shares gapped up as much as 33% on Monday morning.

While the early popularity of the "Barbie" and "Oppenheimer" films bodes well for AMC's third-quarter financials, the company started making waves before Saturday rolled around. 

On July 17, an AMC shareholder sued the company for being late to hold an annual meeting that last occurred in mid-June 2022. While the headline had little effect on the stock price, it likely put AMC stock back on traders' radar after four months of muted activity.

A few days later, AMC announced that it scrapped a seat-based pricing plan to charge customers more for spots with "preferred sightlines" and less for the dreaded first row. A failed pilot test of the idea has the company shifting to a new initiative — front-row seats "with extensive seat recline." The seemingly desperate attempt to make sore-neck seating more desirable did little to inspire traders but reminded them of how wacky and misguided the leadership team can be.

What is the Status of AMC's Stock Conversion Settlement?

Among the criticisms of the July 17 lawsuit was shareholders' need to frequently turn to litigation because of poor corporate governance. The most recent example is a lawsuit brought by AMC common stockholders to block the conversion of AMC Preferred Equity Units (APE) to AMC stock. AMC was sued in Feb. 2023 for allegedly rigging a vote to convert APE to hundreds of millions of AMC shares. 

AMC shareholders oppose the move because it would further dilute an already highly diluted stock resulting from repeated new share issuance. There are nearly 520 million outstanding AMC shares, five times more than three years ago. 

An increase in the number of shares outstanding would give each subsequent share a smaller claim on the company's earnings. 

On Friday, a judge rejected a proposed Delaware court settlement that would've allowed the world's largest movie theater chain to issue even more AMC common shares through the APE conversion. The market cheered the decision, sending AMC stock flying 70% higher in after-hours trading — and APE shares lower. Although the proposed settlement would've compensated AMC shareholders for the dilution to $129 million, it would've unlawfully settled claims of APE shareholders who were not represented in the highly objected lawsuit.

AMC was quick to amend the proposal. On Sunday, the company filed an amended conversion settlement with the court. In a letter to investors, CEO Adam Aron said the modification was made alongside the plaintiffs but the details still need to be discovered. He also reiterated that without the ability to raise new equity capital, the cash-burning company could become insolvent or bankrupt as early as next year.

Expect the court's next decision to create more fireworks for a stock experiencing renewed volatility. If AMC shareholders like the outcome, there could be another big rally. If not, it could be the last straw for the loyal, patient following and lead to a mass selloff.  

What is the Short Interest on AMC Stock?

AMC traders will be on edge in the coming days awaiting the next headline. It's uncertain how soon the judge will return a decision, but AMC likely won't go forward with its second-quarter earnings release until the matter settles. The company has also yet to announce an annual meeting date in response to the other lawsuit, which requested a meeting by August 18. 

As the market awaits these key events, plenty of powder is in the keg for another short squeeze event. Roughly 29% of AMC's float is in the hands of short sellers. This makes it one of the top 10 most shorted U.S. mid-caps. Combined with the stock's low price, bearish Wall Street sentiment and passionate investor base, the pieces are in place for a big-time squeeze. 

There have been major short squeezes in the last two summers, including an epic run above $70 in June 2021. Investors may experience an encore presentation.