Contrarian Investors Should Love AMC

A great question came from a recent AMC-focused Twitter/X “Spaces” discussion: 

"What would it take for institutional investors to buy AMC?”

Yes, retail investors saved AMC. And yes, certain institutional "investors" ruthlessly collude in short sales.

However, not all Institutional Investors are the same. For AMC's stock price to meaningfully improve, you'll need a different type of institutional investor to come in, namely the “Contrarian Investor”.

This is a real type of institutional investor that does a lot more work than your typical “Relative Value” type that can barely link the financials to the company's strategy. 

And, right now, AMC has mostly passive index investors in the stock. 

Companies that manage index funds like Vanguard and BlackRock have zero opinions on the company or the stock. They only own it to the extent that they have it in some mutual fund that is recreating an index like the S&P 500 that is managed by an algorithm to keep the fund in sync with the index.

And, because they have no opinion on the stock, they do not actively do things for the benefit of shareholders. For example, they do not remove the stock they own in the fund from hypothecation (removing the ability to lend shares). 

Nor do they actively lobby the SEC or any other company or regulator for failing to correctly comply with the spirit vs. the letter of Reg SHO (here’s a video I did on this topic).

I think AMC should hit the radar of serious Contrarian Investors. By definition, Contrarian Investors want to find companies that Wall Street hates, i.e. companies everyone believes will go bankrupt, but may not be backed up by company or market conditions. They like companies where the research by Wall Street is poor and/or biased. If the financial media hates the company, all the better.

If AMC doesn’t embody this, I don't know what stock does.

Even the financial data industry, which should have no opinion on stocks, has started to do sketchy things! For example, including operating leases in certain debt calculations where they should not be included.

It's ridiculous. And, it’s also where Contrarian Investors love to start their research. 

A famous example of a Contrarian Investor is Warren Buffet, and his partner Charlie Munger. It’s no secret that I’m a fan! Two specific deals come to mind: American Express, and BNSF Railway. 

Buffet made his first major investment in Amex in the 1960s in the wake of a financial scandal that led Amex stock to drop. As investors fled, Buffet acquired 5% of the company for $20M, and now, Amex is firmly among the top brands in the space.  

Similarly, Buffet acquired BNSF for $26B in the wake of the 2008 Financial Crisis, even paying a premium to what the company was trading for at the time. At the time, it was far from certain that the rail industry would be ok, given how capital intensive it is and that capital markets were in a shambles. In 2021, Buffet would go on to say that BNSF is one of Berkshire Hathaway’s most valuable assets. 

Right now, the key thing to look at with AMC is free cash flow (FCF). Why? Because valuation looks aggressive– unless you believe there is a good chance the debt not only gets refinanced but gets paid off in the coming years. Keeping an eye on what happens with FCF and the company’s debt coming due in 2025 and 2026 will provide the best clues as to where AMC’s valuation should be.