Movie theater giant AMC Entertainment Holdings (NYSE: AMC) has had a roller coaster year. After pandemic closures sent its stock plummeting, it's made an improbable comeback thanks to a grassroots effort among retail investors on social media. Share prices rose from less than $3 in January to nearly $60 at the beginning of June.
Though the stock has dipped a little since, many are wondering if they can still cash in. Here's what you should know before making that call.
A closer look at AMC's skyrocketing share price
A rising share price is often seen as a sign of a good investment, but in this new era of meme stocks, that can be a dangerous assumption. Meme stocks often see their share prices skyrocket because individual investors gathering together on social media decide they want to see the shares go up. It's a decision that isn't based on the company's underlying value, and therein lies the problem with AMC.
The company's dire financial situation during the pandemic caused retail investors on the subreddit WallStreetBets to try to save the company by investing in its stock. In doing so, they helped the company make headlines and stirred up a flurry of new interest in the movie theater chain.
But here's the thing about headlines: They change every day. Eventually, the Reddit investors who pulled off this improbable comeback will move on to something else.
When that happens, AMC's share price is going to once again be determined by the company's actual value. Though their declines may not be as swift as their ascents, most meme stocks will eventually see their share prices fall again.
That doesn't mean it's impossible to make a fortune off meme stocks. But it is pretty improbable because it depends on near-perfect timing. You have to buy in early — in the case of AMC, that would've been back in January when it began attracting attention on social media.
Then, if you want to maximize your profits, you have to sell it at just the right time. So far, AMC's highest stock price came in early June. But there's no way to know if it's going to experience another surge that could take it even higher. It's all a guessing game, and it's largely luck that separates the winners from the losers.
Should you invest in AMC stock?
It's impossible to say whether AMC stock has already peaked or if it has a way to go yet. But it's not a wise investment for most people right now. Even AMC's executives will tell you that.
In a recent Securities and Exchange Commission filing, they wrote (including their own boldface for emphasis): “We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”
If you want a safer investment, focus on companies that have strong business models and advantages that make them leaders in their industries. That could be, for example, a unique product or brand recognition. These are what help companies continue to be profitable.
Stocks like these probably won't have ultra-cheap share prices, and they won't make overnight millionaires in the same way meme stocks will. But they're more likely to slowly and steadily increase their share prices over the coming decades, and that's what matters most when you're investing for the long term.
For beginning investors, an index fund is a great place to start. This is a bundle of stocks you buy together, and it's designed to return a similar performance to its index, like the S&P 500. Owning portions of hundreds of companies prevents any single one from affecting your portfolio too much, which can help reduce your risk of huge losses.
You could also purchase individual shares of stocks, or fractional shares if you don't have enough money for a full share. But be careful not to put too much of your money into any one company, whether AMC or something else. When you're talking about your life's savings, that's too big a risk to take.
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Kailey Hagen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.