If you’re an AMC Entertainment Holdings (NYSE:AMC) shareholder, there’s one catalyst you’re looking forward to above all else: the short squeeze.
AMC stock has extremely high short interest. According to Marketbeat, 85 million AMC shares out of 499 million total are sold short. That gives a short interest ratio of 17%.
This situation provides an opportunity for long-term shareholders to profit — if they hold long enough. The longer short-sellers sit on their positions, the more interest they’ll have to pay on their loans. When they eventually have to cover their positions, it results in buying that pushes the price higher. This is the essence of a short squeeze: longs can profit from the buying activity when shorts cover.
If all of AMC’s shorts were to cover today, the company’s shareholders would realize a quick, tidy gain. That’s a fact. But there are real questions about whether a short squeeze will enrich investors who buy at today’s prices. If the stock price falls dramatically (say, to $10) and shorts cover at that price, the stock likely won’t go to a price where investors who bought at $50 will realize a gain. And as we saw with BlackBerry, meme stocks can and do go down in price quite dramatically sometimes.
In this article, I will look at the possibility of an AMC short squeeze and whether investors can profit from it.
AMC has very high short interest
The most basic requirement for a short squeeze is undoubtedly present in AMC shares: high short interest.
As mentioned earlier, about 17% of AMC’s float (85 million shares) are being sold short. That’s a high percentage, so if all shorts covered on the same day, they’d drive up the price. However, there are a few points to keep in mind:
- Not all shorts are guaranteed to cover on the same day. If the buys are spread out over a year, then the effect will be subtle on a daily basis.
- Some shorts may commit to their positions and not buy for a very long time, making it less likely that there’ll be a squeeze soon.
- If a short-seller goes bankrupt, they may not cover, ever, and there will be no increase in demand from that short-seller buying shares.
High short interest doesn’t mean a stock will rise compared to today’s price
What all of the points in the previous section lead up to is this:
A future short squeeze does not at all imply that a stock will rise compared to today’s price. As we’ve seen already, shorts may take a good, long while to cover. If they do, and the stock goes down in the interim, then it may never rise to a price exceeding today’s price. Additionally, if their losses are severe enough, they may never be able to cover at all. So, a short squeeze is never a certainty, and when one does happen, it doesn’t necessarily reward all shareholders who’ve held in the past. It all heavily depends on the price the stock is at before the squeeze occurs.
This is something AMC investors will have to keep in mind if they’re hoping for a short squeeze. The lower AMC stock goes, the less likely it is that a squeeze will enrich people holding today. The squeeze may not happen, but that doesn’t mean it will make you rich.
Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry.