The ‘long squeeze’: Reddit crowd could be trapped by the share frenzy they created

Most investors know what a “short squeeze” is but is there such a thing as a “long squeeze?” The horde of internet chatroom-inspired retail investors who have been squeezing the short sellers in AMC Entertainment shares may be finding out.

Flushed with the success of their assault on the shorts in GameStop earlier this year, retail investors targeted AMC, the world’s largest theatre chain.

AMC’s share frenzy has many on Wall Street shaking their heads.Credit: AP

On the verge on bankruptcy at the start of the year after the debt-laden group lost $US2.2 billion ($2.8 billion) – with a further $US567 million of losses in the first quarter of this year – the plunge onto its register by the retail investors who now own about 80 per cent of its shares may well have saved the company, or at least significantly deferred the day of judgement.

The Reddit-inspired attempt to emulate the largely successful GameStop play, which drove the video game company’s share price up from less than $US20 to a peak of $US347 (it’s still trading at about $US280 a share) has had a similar impact on AMC.

AMC’s share price started the year around $US2, has been above $US72 and is now about $US55. It now has a market capitalisation of more than $US28 billion, enough to put it firmly into the S&P500!

Like GameStop, the retail investors were motivated by the opportunity to squeeze hedge funds that had short positions in the stock. There’s a strong anti-Wall Street, anti-establishment sentiment at play.

The GameStop dynamics were somewhat different to AMC’s because it had been so heavily shorted – about 140 per cent of its capital had been sold short by hedge funds, which implies a lot of unlawful “naked ” short-selling – that even relatively modest buying by the retail investors forced the price up dramatically as the shorts were forced to cover.

A short-seller sells shares that they don’t actually own, planning to buy them in the market once the share price falls (they hope) and therefore lock in a profit. To effect the transaction they “borrow” the equivalent number of shares that they have sold, paying an existing shareholder a fee.

In a “naked” short sale, the shares aren’t borrowed (to avoid the fee), which is akin to increasing the company’s capital base without the company or its shareholders knowing or approving the increase. It’s illegal in most jurisdictions, including the US, albeit difficult to police.

The short-sellers in AMC have nothing like the positions hedge funds held in GameStop. While there might some naked shorts, the disclosed short position appears to have hovered around 20 per cent of AMC’s capital, or just below.

They might have a tight squeeze on the short-sellers but, equally, they have to keep buying AMC shares and at least maintain, indefinitely, a price that even AMC believes is unsupported by any fundamentals to avoid a crash that would wipe them out.

There’s also enormous liquidity in the market for AMC shares – last week nearly 800 million shares changed hands in a single day – which ought to enable short sellers to cover their positions if they want to close them out.

The key factor that differentiates AMC from GameStop, however, isn’t to do with the short sellers (although it might impact them) but with the way AMC’s management has responded to the Reddit crowd’s invasion of their register.

They’ve embraced them and taken advantage of them. So has Wall Street.

As the retail shareholder invasion of the register got underway, a private equity firm, Silver Lake Investment Partners, switched a $US600 million convertible bond position into equity and sold that stake for $US713 million. AMC’s debt was reduced significantly by the transaction and Silver Lake made a tidy profit from an investment that looked doomed late last year.

Last month AMC’s controlling shareholder, China’s Dalian Wanda, claimed it had doubled its original investment when it sold almost all its AMC shareholding at $US14 a share, cashing out $US1.5 billion.

AMC’s board and management have also recognised the unique opportunity presented by a horde of investors unconcerned about the company’s fundamentals and the uncertainty over the future of theatres in a post-pandemic, streaming world.

Last Tuesday they placed $US230 million of stock with Mudrick Capital, a distressed debt and “event-driven” investor. Mudrick immediately dumped the stock into the market and walked away with a profit, telling its own investors AMC shares were overvalued.

On Thursday AMC announced plans to sell another 11.55 million shares – roughly $US5870 million of new capital – via on-market sales co-ordinated by its brokers, B.Riley and Citigroup.

With the other equity raising and equity-for-debt swaps it has made, that would bring the total amount of new equity AMC has issued or is about to issue to close to $US2 billion.

It has also said, having used up its current capacity to issue new shares without shareholder approval, it will seek permission to issue another 25 million more shares next year.

AMC is the latest struggling business boosted by wild retail trading.Credit: AP

In its filing with the Securities and Exchange Commission for the latest share sale, AMC made some highly unusual statements.

It warned potential investors that its current share prices reflected “market and trading dynamics” unrelated to its underlying business or industry fundamentals and cautioned them against investing in its shares unless they were prepared to incur the risk of losing all, or a substantial proportion, of their investment.

AMC has embraced its new shareholder base, communicating with them via the chatrooms and promising them free popcorn, exclusive screenings and “other benefits.”

It isn’t surprising that the company has welcomed the new shape of its register because those retail investors, by driving up the share price, have helped the company raise equity that would not have otherwise been available to a company as indebted, as loss-making and haemorrhaging cash as heavily as AMC.

It’s also enabled board members and some senior executives to raise $US8 million for their personal accounts by selling shares at prices that were inconceivable six months ago.

The capital raisings that the retail investor interest has facilitated highlights the unusual dynamic at play in AMC.

By pushing the price up to squeeze the shorts those investors have awarded other big players, not just a way out of a previously-distressed investment, but big profits. They have also enabled AMC to raise a lot of capital that it couldn’t have raised without them, reducing the acute risk in its balance sheet.

The capital raisings have been made possible by the retail investor base but dilute their interest in the company substantially. AMC had about 104 million shares outstanding at the end of last year. It will now have more than 400 million.

That level of dilution would conventionally sink the share price. Instead, to maintain their short squeeze, the retail investors have to keep pushing the price up even in the face of the extra shares that AMC is creating and dumping as fast as it can to exploit the peculiar market in its shares.

That’s why the position of the retail investors could be described as being trapped in a “long squeeze.”

They might have a tight squeeze on the short-sellers but, equally, they have to keep buying AMC shares and at least maintain, indefinitely, a price that even AMC believes is unsupported by any fundamentals to avoid a crash that would wipe them out.

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