To The Moon

AMC Stock Surged Ahead of Earnings. The 'APE' Saga Continues

AMC Entertainment Holdings stock surged on Monday, as traders piled in ahead of the firm's earnings report on Tuesday and after a Delaware Chancery Court filing indicated that a potential dilutive share authorization could be delayed.

$AMC Entertainment(AMC)$ rose 23% to $7.61 on Monday. AMC Preferred Equity Units, which could ultimately convert to common stock pending shareholder votes, were down 4.4% to $2.05.

Reuters reported Monday that a Delaware Chancery Court judge ruled on Monday that AMC will face an April 27 hearing. The company is being sued by AMC shareholders who argue that its issuance of APE units cuts voting power of common shareholders that hold AMC stock. The company is asking its shareholders to vote at a March 14 meeting on proposals, including an increased stock authorization and a 10-for-1 reverse stock split, that, if passed, would allow APE units to convert into AMC common shares. The court filing indicates that AMC and the shareholders suing agreed the vote could go on, but AMC won't increase shares prior to a hearing in late April about the APE share issuance.

Large moves in AMC and other so-called meme stocks are not unusual. Such stocks thrive on social media chatter and armies of devoted traders placing risky bets. They engage in a tug of war with short sellers betting that the stock will decline. Risky options trading activity can also supercharge volatility in such stocks. Options markets imply AMC stock will move about 15%, up or down, following earnings on Tuesday. AMC shares dropped almost 8% after reporting third quarter numbers in early November.

Feeding into the volatility are arbitragers seeking to profit on the price gap between common shares and APE shares.

For the firm's fourth-quarter earnings report, Wall Street analysts polled by FactSet expect AMC to report an adjusted fourth-quarter net loss of 6 cents a share on sales of $1.03 billion. Wedbush analyst Alicia Reese wrote on Monday that the fourth quarter will likely close the pandemic chapter for the theater chain, though she thinks the stock itself is overvalued.

She rates AMC stock at Underperform, with a $2 price target for AMC stock, or a $4 target when combined with the APE units.

She does warn that the firm has "a cohort of retail investors that are steadfast, and will likely continue to prop up shares to some extent for a while longer."

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