Hedge fund Mudrick Capital lost 10% in just a few days of trading as shares of meme stock AMC Entertainment spiked to record highs, the Wall Street Journal reported, citing people familiar with the matter.
The losses were driven by call options sold by firm founder Jason Mudrick, according to the WSJ. The position, intended to serve as a downside hedge, ended up backfiring as the stock surged too much, too fast.
The runaway share spike occurred on June 2, when AMC shares rose as much as 127%, to $72.62, well beyond the strike price of $40 for Mudrick’s options.
Just one day prior, Mudrick had disclosed a $230.5 million purchase of new AMC stock, then immediately sold those shares at a profit, according to a Bloomberg report. Despite the success of that leg of the overall AMC trade, Mudrick’s calls on the stock were still held short, leaving them vulnerable to the June 2 surge, the WSJ found.
Mudrick did close out all options and debt positions on June 2, albeit too late to avoid the squeeze. While the fund did earn a roughly 5% return on the debt, it ended up absorbing a net loss of 5.4% because of the options trade.
Though the fund took a hit amid the surge, it’s still up about 12% for the year, the Journal said. Meanwhile, AMC, the world’s largest movie theater chain, is up more than 2,000% year-to-date.
Retail traders have been dealing blows to short sellers and hedge funds this year as they’ve poured into stocks with high short interest rates in order to force a short squeeze. Earlier this year, investors on Reddit’s Wall Street Bets led a share price surge in GameStop, which caused short sellers to lose billions.
Amid the renewed meme-stock interest in recent weeks, short sellers have continued to lose money in retail-trader favorites like AMC and GameStop. The meme stock trade has scared off many short sellers from heavily betting against certain stocks.
Aron, the 66-year-old chief executive officer of AMC Entertainment, has embraced the company’s status as a meme stock in recent months during earnings calls, on Twitter and YouTube, in press releases, and even in monetary donations. He’s even offered free popcorn.
The more than 3 million retail traders holding shares of the company have helped drive AMC’s stock price up about 2,300% this year.
The individual investors, mobilized on Reddit investing threads and Twitter, call each other “apes,” and to them, Aron is “Silverback” – a gorilla pack leader. “All hail the silverback,” one Redditor said in a Friday post.
The Harvard Business School graduate has bucked the trend of other CEOs who have remained virtually silent on their company’s status as a retail-trader favorite and instead reached out to the horde of fans of AMC stock.
On the May 6 earnings call, Aron called them “an army of passionate, interested individual shareholders.”
“They own AMC. We work for them. I work for them. So, by definition, their interests and passions are important to AMC. Their interests and passions are important to me,” he said, according to a transcript from Seeking Alpha.
The millions of traders make up about 80% of the company’s shareholder base.
“Why would you not recognize them? Why would you not embrace them?” Steve Sosnick, chief strategist at Interactive Brokers told Insider. “Management is supposed to be working on behalf of the shareholders, and those are your holders.”
Aron may be signaling a new era of communicating with individual shareholders, said David Jones, Chief Market Strategist at European investment trading platform, Capital.com. AMC and Aron did not respond to Insider’s request for comment for this article.
“We are used to CEOs speaking at stuffy shareholder meetings, and only showing interest in their large institutional investors,” Jones said. “With Mr. Aron taking part in, for example the Youtube discussion on Thursday, he really is opening up to a whole new area of investors that perhaps in the past companies may have appeared to be somewhat dismissive of.”
On June 3, the CEO reached out to his shareholders in a YouTube video with Trey’s Trades, a popular retail investing channel with nearly 300,000 subscribers. He referenced the investing “apes” as he made an argument for the company’s hope to sell 25 million more shares.
The “ape” references don’t stop there. Aron announced on an earnings call that he would donate $50,000 of his money and $50,000 of AMC Cares money to the Dian Fossey Gorilla Fund, which helps endangered gorillas in Africa, as noted in the 1988 film “Gorillas in the Mist” – which he dubbed “extraordinary and heartwarming.”
“The passions of our shareholders become our passions, too,” he said on the call.
On June 2, AMC announced a new initiative called AMC Investor Connect, in which company shareholders can get perks, like free popcorn, and direct communications with Aron.
Playing with fire
All of the outreach to retail traders could be a multi-faceted endeavor, market analysts told Insider.
The company has a heavy debt load and has flirted with bankruptcy in the past. The COVID-19 pandemic presented another set of hurdles as movie theaters shuttered and more entertainment options became available for streaming.
“I certainly tip my hat to the CEO who was in a tough desperate situation and has made the most of it to keep his business alive and maybe even one day thrive,” said Richard Smith, an investing and market cycles expert.
As shares rallied to all-time highs this week, the company issued more stock. Thursday alone, the company sold 11.6 million shares for $587 million after a $230 million sale of $8.5 million shares to hedge fund Mudrick Capital, which the hedge fund later sold for a profit.
“If the market says that your stock is worth X and you have an opportunity to sell some of it at prices that really allow you to shore up your balance sheet in a very inexpensive way, I think you’d be imprudent if you didn’t do that,” Sosnick said.
“The AMC CEO is catering to the crowd because he knows they’re making shares more valuable. He’s happy to cater to the retail investors if they push up the share price,” said Lars-Alexander Kuehn, associate professor of finance at Carnegie Mellon University’s Tepper School of Business.
Smith, the CEO of The Foundation for the Study of Cycles, said Aron also sees the shareholders as movie-theater patrons.
“He needs those people to support his business,” he said. “It’s incredible PR for a business that desperately needs people to get up and go to the movies.”
But Smith said, Aron is “playing with fire,” as the focus has shifted to share price instead of future earnings.
“I think he’s certainly encouraging the idea that we will all be buying and selling things with memes by embracing it as unapologetically as he has, and I think that could definitely come back to bite him in a big way.
But hey what’s the difference between him and Elon Musk? Tesla would not be where it’s at today if it wasn’t for Musk’s memes.”
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Mudrick Capital’s purchase and then quick sale of AMC stock shows retail investors aren’t the only ones making money during the latest meme stock trading frenzy, said David Trainer, CEO of investment research firm New Constructs.
Trainer called the hedge fund’s quick profit an example of “institutions dunking on retail investors.”
He acknowledged that there are also retail investors profiting from the sale, but says the trading is risky and investors should take profits now.
Mudrick Capital’s purchase and subsequent quick sale of AMC stock shows retail investors aren’t the only ones making money during the latest meme stock trading frenzy, said David Trainer, CEO of investment research firm New Constructs.
Mudrick Capital sold all its stock in AMC Entertainment Holdings Inc. for a profit on Tuesday, the same day the movie theater chain disclosed the hedge fund had bought $230 million worth of shares, Bloomberg reported. The firm then went as far as to call AMC’s stock overvalued in the aftermath. The move didn’t sit well with Trainer.
“A blatant example of institutions dunking on retail investors comes from the Mudrick Capital trade,” he told Insider. “They bought 8.5 million shares from AMC and turned around and sold it directly to the public for a quick profit.”
The meme trading frenzy isn’t an example of retail investors “beating” institutions as there are still institutions profiting from this as well. While there are a handful of retail investors getting rich, institutions like Mudrick as well as brokers who collect fees from the trading frenzy are also drawing in money, Trainer said.
“Wall Street insiders are preying on the naivete of retail meme stock traders,” Trainer said in an email.
His message for retail investors who’ve gotten in on the AMC trade?
“Take the gains you’ve made right now to the bank, don’t try to time the market.”
AMC Entertainment surged Wednesday despite a share dump from hedge fund Mudrick Capital.
Shares of the world’s largest movie theater operator jumped as much as 126% to trade around $72, triggering a halt for volatility. The surge built on Tuesday’s gains, which pushed the stock 23% higher during the session to close at $32.04. AMC shares have now spiked almost 500% in just seven trading days.
The Leawood, Kansas-based company announced Tuesday it raised $230.5 million in cash after agreeing to sell 8.5 million shares to Mudrick Capital for $27.12 each, a dollar higher than the stock’s Friday closing price. Shares surged following the news as the company said it would use the funds to make acquisitions, improve consumer appeal, and deleveraging.
Just hours after the announcement, Mudrick Capital sold its entire stake at a profit, Bloomberg reported. Despite the share dump, the meme stock continued its rally early Wednesday as retail traders remained bullish. The stock remained one of the top talked-about companies on Reddit threads like Wall Street Bets, HypeEquity data showed.
AMC has led a broader rally in meme stocks, like GameStop and BlackBerry, so far this week amid renewed interest in the retail-trader favorites. BlackBerry, for its part, closed 15% higher at $11.56 Tuesday and continued rallying in early morning trading, as GameStop closed 12% higher at $27.02 Tuesday and upticked just slightly Wednesday.
Last week, shares of the movie theater operator rallied for days after private Chinese conglomerate Dalian Wanda Group announced it sold nearly all of its remaining stake in the company. Retail traders cheered the newly available shares, more than doubling the stock price through the course of the week.
Retail traders have invested in heavily shorted stocks like AMC and GameStop, in an effort to squeeze short sellers, who have lost billions on their bets. But shorts haven’t given up as short interest in the stocks is 21%, according to MarketBeat data.
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AMC Entertainment wants to keep in touch with the army of retail traders who helped push the stock to an all-time high Wednesday.
The movie theater chain announced Wednesday it would launch a new initiative called “AMC Investor Connect,” to put the company “in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders” with information and perks – like a free large popcorn at the movies this summer.
“Many of our investors have demonstrated support and confidence in AMC,” AMC Chief Executive Officer Adam Aron said in the statement. “We intend to communicate often with these investors, and from time to time provide them with special benefits at our theatres.”
AMC said the program will provide communications directly from the CEO, free or discounted items, invitations to special screenings, and “interesting information” about the company and its “place in the movie eco-system.” The company said investors worldwide can sign up but must first be an AMC Stubs member.
AMC, along with others like GameStop and BlackBerry, have become retail favorites in the new trend of meme stocks. Traders on sites like Reddit and Twitter have poured into the stock, in part to squeeze short sellers betting against the company.
As of March 11, more than 3.2 million shares, or 80% of the company’s ownership, belonged to retail investors, AMC said in the statement.
The new initiative isn’t the first time the company has reached out to retail investors. During March and May investor calls, Aron thanked the millions of retail traders who have backed the stock in recent months – sending it to all-time highs and adding $120 million to his fortune – and said he’s optimistic about the new horde of investors.
“Just go on Twitter, just go on Reddit, just go on YouTube, read what these people write. They love AMC,” Aron said on the May 6 call, according to a transcript from Seeking Alpha. “These are not people who are just going to be investors in AMC. These are going to be customers of AMC who come to our theaters and enjoy watching movies at our theaters as paying guests.”
The army of retail investors backing the stock have remained optimistic despite large backers exiting their positions. Tuesday, AMC announced an agreement for an 8.5 million-share sale to hedge fund Mudrick Capital, and hours later the fund dumped the shares at a profit.
But retail traders on sites like Reddit’s Wall Street Bets and Twitter continued sending the price higher, as the stock rallied 29% to an all-time high share price above $40 Wednesday. The hashtag #AMCARMY trended on Twitter amid the surge.
And last week, private Chinese conglomerate Dalian Wanda Group sold most of its remaining stake in the company, and retail traders cheered the new opportunity to buy up shares.
Mudrick disposed of the stake after concluding AMC’s stock is overvalued, propelled higher by a wave of enthusiasm among day traders, Bloomberg reported, citing an unnamed person with knowledge of the matter.
AMC shares held to hefty gains following the mid-afternoon report, up by 19% at $31.10.
Last week, AMC surged 116% as retail traders active on Reddit and Twitter banded together to squeeze short positions. The rally was originally catalyzed by major shareholder Dalian Wanda Group selling almost all of the remainder of its stake in the company. Redditors responded by cheering the newly available shares and making their newfound weight felt in the market.
AMC has been in recovery mode after the COVID-19 pandemic forced it to temporarily close locations worldwide to help curb the spread of the disease. It said Tuesday the funding from Mudrick would go in part toward potential acquisitions and that it was discussing a potential deal for Arclight Cinemas and Pacific Theatres. Those chains were shut down last month by Decurion Corp. which decided to close its roughly 300 movie houses.
AMC led a broader rally in so-called meme stocks last week that included GameStop and Virgin Galactic. Short-sellers wound up losing nearly $3 billion betting against those three stocks alone, according to financial-analysis firm Ortex.
“With our increased liquidity, an increasingly vaccinated population and the imminent release of blockbuster new movie titles, it is time for AMC to go on the offense again,” AMC said in its early Tuesday statement.
The news comes on the heels of a 116% surge for AMC last week as retail traders active on Reddit and Twitter banded together to squeeze short positions, pushing the stock even higher in the process.
AMC’s share rally was originally catalyzed by major shareholder Dalian Wanda Group selling almost all of the remainder of its stake in the company. Redditors responded by cheering the newly available shares and making their newfound weight felt in the market.
AMC led a broader rally in so-called meme stocks last week that also included GameStop and Virgin Galactic. Short-sellers wound up losing nearly $3 billion betting against those three stocks alone, according to financial-analysis firm Ortex.
The movie-theater chain’s business was hit hard by the COVID-19 pandemic as it was forced to close locations worldwide to help curb the spread of the disease. The company said Tuesday the cash proceeds from the Mudrick share sale primarily will be used to acquire more theatre leases and used for investments to enhance the consumer appeal of its current theatres.
“Given our scale, experience and commitment to innovation and excellence, AMC is being presented with highly attractive theatre acquisition opportunities,” said AMC CEO Adam Aron in a statement. “We are in discussions, for example, with multiple landlords of superb theatres formerly operated by Arclight Cinemas and Pacific Theatres,”
Last month, Decurion Corp. decided to shut down its roughly 300 movie houses, including the famed Cinerama Dome on Sunset Boulevard in Los Angeles that first opened in 1963.
“With this agreement with Mudrick Capital, we have raised funds that will allow us to be aggressive in going after the most valuable theatre assets, as well as to make other strategic investments in our business and to pursue deleveraging opportunities,” Aron said.
The company also aims to continue exploring ways to deleverage. “With our increased liquidity, an increasingly vaccinated population and the imminent release of blockbuster new movie titles, it is time for AMC to go on the offense again,” said the statement.