Fri, Jun 4, 2021|Dan Ferris

It's Better to Feed the Ducks Than Be One

An old Wall Street adage is relevant today... From breadcrumbs to free popcorn... A 95% jump and an 18% decline in back-to-back days... A classic sign of a blow-off top... The best advice for long-term investors... It's better to feed the ducks than be one...

When the markets get really frothy, you'll often hear folks reciting an old Wall Street adage...

When the ducks quack, feed 'em.

It's a bit of contrarian advice... Essentially, it's counseling investors to take the other side of a trade when crazed speculators clamor loudly – like ducks – for a particular security, pushing its valuation to absurd extremes.

This adage might sound familiar to loyal Digest readers...

I (Dan Ferris) mentioned it way back in September 2019, when I quoted money manager Josh Brown. He alluded to the saying while warning investors that Wall Street almost got away with selling them office-space-leasing company WeWork for $50 billion...

Ritholtz Wealth Management CEO and CNBC regular Josh Brown posted a video about [co-founder Adam] Neumann's ouster and the failure of WeWork's IPO on Twitter. He also wrote...

Wall Street was THISCLOSE to selling you #WeWork at $50 billion. Stop quacking like a duck and they'll stop throwing breadcrumbs at you.

Investors will never stop quacking like ducks and Wall Street will never stop trying to make money by shoving toxic breadcrumbs down their throats... though maybe they're more like geese, with Wall Street forcibly fattening them up to make foie gras.

Whichever waterfowl you like, Brown nailed his point...

It seems like everywhere you look on Wall Street, some rich dude is taking investors for a ride. And they're quacking like crazy, practically begging him to do it.

By taking the other side of notable quacking-duck trades in recent decades, you would've been out of Internet stocks in 1999 and early 2000... banks and mortgages in 2006 and 2007... and "meme stocks" like movie-theater chain AMC Entertainment (AMC) today.

AMC shareholders might be the most well-fed ducks in market history...

Sure, you can make a case for video-game retailer GameStop (GME) and all the other Great Meme Stocks of 2021. But these days, AMC is feeding the quacking ducks like no one else...

That's true both figuratively and literally.

You see, AMC's management team, aided by a hedge fund, has fed its shareholders three times this week, twice by selling them more than $1 billion in new equity offerings and once by... well... giving them free duck food.

The first feeding came early Tuesday, when AMC announced that it had sold $230 million of new shares to a single investor – hedge fund Mudrick Capital, which specializes in distressed investing.

It's a bit unusual for a company to issue that much new equity to a single shareholder, but it's far from the most unusual thing to happen in recent years. And Mudrick is no duck. It fed them this week, and it wasn't the first time it has done so...

Mudrick lent the company $100 million last year to stave off bankruptcy, as COVID-19 pandemic lockdowns shuttered its movie theaters all over the world. And then, earlier this year, the hedge fund swapped AMC bonds for new shares and immediately sold them.

So it should've been no surprise at all when Mudrick sold the AMC shares it bought earlier this week... on the same day that AMC announced that it had sold them to Mudrick.

That's right... Mudrick once again flipped the AMC shares for a quick profit. All told, according to the Financial Times, Mudrick has made $200 million flipping AMC shares.

And Mudrick isn't the only big shareholder who has fed all the ducks in recent months...

Chinese conglomerate Dalian Wanda, AMC's longtime controlling shareholder, sold nearly all of its 7% stake in May. Private-equity firm Silver Lake also swapped AMC debt for equity and sold out in January for a $113 million profit.

To make matters even worse... when Mudrick dumped its AMC shares, somebody in the know told news service Bloomberg that the hedge fund concluded that the stock was overvalued.

You might think a transaction like that would seem cynical to everyday investors... and that they would respond by dumping the stock en masse. But that's far from what happened throughout the next day, thanks in large part to what came next...

The second feeding for AMC shareholders came Wednesday – and it was actual duck food this time...

In a press release, AMC unveiled "AMC Investor Connect." And it described the program as "an innovative, proactive communication initiative that will put AMC in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders."

Shareholders who sign up for AMC Investor Connect "will receive an initial offer of a free large popcorn when attending a movie" at any AMC-owned theater this summer.

Duck food.

The company is handing out plenty of it for all those "enthusiastic and passionate" ducks – er, I mean "individual shareholders" – who have bid shares up roughly 2,300% since the start of this year.

And free popcorn is just the beginning. According to AMC's press release, retail shareholders will also receive...

Shareholder-exclusive promotions, including free or discounted items, and invitations to special screenings

Communications directly from CEO and President of AMC Theatres, Adam Aron

Other interesting information about AMC and its place in the movie ecosystem

That all sounds super interesting... I mean, direct communication from the head of the company? AMC's place in the "movie ecosystem"? That beats free popcorn any day, right?

These ducks might be a bunch of noisy know-nothings, but when they all take flight together, don't get in the way...

Thanks to the horde of retail investors, AMC's stock soared to a new all-time high on Wednesday. The stock closed at $32.04 per share on Tuesday. A day later, it was up 95% to $62.55 per share. And it went up another nearly 9% in after-hours trading.

Just take a look at this one-year chart of AMC. As you can see, the recent action blows away what happened back in late January during the previous major feeding of AMC ducks...

Not content with just driving AMC's stock higher, these retail investors also took aim at Mudrick's special purpose acquisition company in a revenge attempt... Mudrick Capital Acquisition II (MUDS) closed down 15% on Tuesday after Bloomberg's story broke.

Trading in AMC was so frenzied that day, Nasdaq halted trading in the stock four times.

I guess the ducks didn't learn their lesson after all.

Apparently free popcorn means the value of the business almost doubled in a day...

Let's just ignore that the movie industry still faces the same headwinds of pandemic-related restrictions in many places. And we'll also pretend that the secular move toward in-home movie streaming and other video-entertainment consumption isn't happening.

Overall movie-theater attendance has been declining for more than a decade... According to a December 2020 report from research firm Deloitte, the average number of movie tickets bought by U.S. moviegoers fell from 4.2 in 2009 to 3.4 in 2019. And that's before the COVID-19 pandemic hit and forever changed entertainment-consumption habits.

I have to hand it to AMC's management team, though... It's making hay while the sun shines by doing exactly what it should do – selling as many shares as possible while they're egregiously overvalued, and paying peanuts... or rather popcorn... to do it.

That leads us to yesterday, when AMC announced its third (and largest) duck feeding of the week...

The company filed with the U.S. Securities and Exchange Commission ("SEC") to sell up to 11.55 million new shares at market prices.

At Wednesday's closing price, proceeds from the sale would've topped $722 million. But the stock fell so much yesterday that, once again, trading was halted... It fell as much as 40% in frenzied trading throughout the day and recovered slightly to finish down 18%. It'll be interesting to see how much AMC actually takes in once the sale concludes.

In the meantime, who knew ducks were such finicky eaters?

We all should've known, though...

With the big players like Dalian Wanda, Silver Lake, and Mudrick exiting the stock, the meme crowd has been in charge for some time. When AMC announced the free popcorn on Wednesday, it noted that 3.2 million individual shareholders owned 80% of the stock (as of March 11).

That's a flattering read on the situation...

Those 3.2 million folks likely held on for less than four days since the shares change hands at such a blistering pace. Including this week's duck feedings, AMC appears to have roughly 470 million shares outstanding. Its three-month average daily trading volume is 123 million shares. At that pace, its entire shareholder base essentially turns over every 3.8 days.

Yesterday, nearly 600 million AMC shares changed hands. And on Wednesday, a remarkable 766 million shares traded – roughly 63% more than the company has outstanding.

The ducks were a little quieter today, with only about 320 million shares traded... And the stock sold off about 6.5% on the day, closing at around $48 per share.

It's anybody's guess who will hang on long enough to enjoy the free popcorn this summer.

And if investors listen to AMC management's advice, they won't even buy the stock in the first place...

For all of the company's praise of its shareholders' enthusiasm and passion earlier this week, AMC management doesn't think they're very smart to own the stock. In yesterday's SEC filing, complete with bolding for emphasis, it offered investors the following warning...

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.

Here's a pretty simple guideline to follow if you're just starting out as an investor...

When the company's management team tells you it's selling new shares but that you shouldn't buy them unless you're ready to "incur the risk of losing all or a substantial portion of your investment"... that current market prices are "unrelated to our underlying business"... and that it doesn't know "how long these dynamics will last"...

Maybe you should at least entertain the idea of believing them!

Given yesterday's early rout, it appears that at least somebody heeded the advice (phew, at least everyone hasn't gone insane yet). But unfortunately, it didn't last long...

With the stock closing down only 18% yesterday after dropping as much as 40%, it's clear that the ducks are still in charge. They're still assigning the company an absurd valuation.

Berna Barshay, an editor at our corporate affiliate Empire Financial Research, detailed just how absurd the valuation is in her Empire Financial Daily e-letter on Wednesday...

Back at the end of 2019, AMC's enterprise value ("EV") – the sum of its market cap and all its outstanding debt net of any cash on its balance sheets – stood at just over $5 billion. [On Wednesday], with the stock trading around $62 per share, the EV stands at almost $36 billion.

Does anyone really think that the pandemic made AMC worth almost 7 times more than it was worth before?

What has happened since then? Well, the exclusive theatrical window blew up, theaters were closed, and AMC burned $1.6 billion of cash in five quarters. Clearly a recipe for EV going up 575%. And just for comparison's sake... over the same period, Internet giant Amazon's (AMZN) EV went up just 75%. Pandemic winner poster children like video chat service Zoom (ZM) and home fitness company Peloton (PTON) only saw their EVs rise 350% and 100%, respectively, over the same time period.

As Berna noted, the EV of $36 billion on Wednesday means investors believe AMC is more highly valued than companies with much larger and more dominant businesses. She cited news and sports titan Fox (FOXA) and satellite radio operator Sirius XM (SIRI) as examples.

Unlike Whitney, I've been bearish on the overall U.S. stock market for much of the past four years...

The only exception is a brief episode of bullishness starting in April 2020. It has been a volatile time... But overall, I must admit that it has been the wrong call so far.

Still, I believe this AMC duck-feeding frenzy is a classic sign of a blow-off top.

I could be wrong again, of course. But I've lived through too much of this sort of nonsense – including more than two decades in this business – not to arrive at that conclusion.

And like me, value-investing legend Jeremy Grantham is bearish on a lot more than Whitney right now...

Grantham told attendees at a conference in Sydney, Australia, earlier this week that he believes U.S. tech stocks and special purpose acquisition companies have already peaked. Then, he concluded...

My guess is, in the next few months, the termites will get to the rest of the market.

Grantham and his investment firm, GMO, are well-known as students of bubbles, though they have a history of acting early...

For example, GMO moved out of Japanese stocks in 1987, and it underperformed painfully for three years before the bubble eventually popped.

Likewise, the firm sold stocks in 1997 when the S&P 500 passed its 1929 peak valuation of 21 times earnings. Then, as Grantham recalled in a January letter to investors...

[We] watched in horror as the market went to 35 [times] on rising earnings. We lost half our Asset Allocation book of business, but in the ensuing decline, we much more than made up our losses.

But Grantham's insights have added at least some value for investors. As he also noted...

I came fairly close to calling one bull market peak in 2008 and nailed a bear market low in early 2009.

The S&P 500 actually topped out in October 2007, but if you didn't turn bearish until 2008, you still avoided the worst damage. The next bull market started in March 2009... There hasn't been a better time to turn bullish in my career.

You could argue that all this talk about quacking ducks not getting enough of the popular stocks and investors like Whitney and Grantham being bearish enough in varying degrees to call tops in places where they see bubbles is a bit academic.

You could also argue – and I would agree with you – that there's no need to time the top of any group of stocks unless you're interested in a risky, speculative bet against them.

But in the end, as long as you avoid those stocks, you can watch from the sidelines while the ducks' favorite foods are blown out of the sky one by one... It's going to happen.

And of course, if you're a long-term investor, you can simply follow my usual advice...

Focus on owning good businesses and protecting your wealth. And hold a well-diversified portfolio, including the same four core elements I've talked about for a couple of years...

Stocks and bonds
Plenty of cash
Gold and silver
A little bitcoin

That's just a basic skeleton...

Maybe you don't like bitcoin, so you don't want to include it. Maybe you would rather put your money into land, art, or some other time-honored store of value. That's OK, too.

The point is... an adequately diversified portfolio focused on capital appreciation and wealth preservation prepares you for great businesses to keep generating good returns (stocks and bonds)... for deflation and bear markets to make stocks cheaper, providing a new buying opportunity (plenty of cash)... for inflation to make life difficult for businesses and cash holders (gold and silver)... and for a potentially massive disruption in the structure of the financial industry (bitcoin).

In other words, as I've said before, it prepares you for a wide range of potential outcomes.

Besides being adequately diversified, I'll leave you with one other obvious bit of advice...

If you catch yourself quacking after any of the stocks on Whitney's list that I shared earlier, stop immediately and consider taking the other side of the trade. It's better to sell and get away from whatever the ducks are quacking for than to quack alongside them.

It's better to feed the ducks than be one.

New 52-week highs (as of 6/3/21): American Financial (AFG), American Express (AXP), Dropbox (DBX), Western Asset Emerging Markets Debt Fund (EMD), Flowers Foods (FLO), GreenTree Hospitality (GHG), Huntington Ingalls Industries (HII), Intuit (INTU), JPMorgan Chase (JPM), Coca-Cola (KO), Cheniere Energy (LNG), Motorola Solutions (MSI), VanEck Vectors Oil Services Fund (OIH), Invesco Dynamic Oil & Gas Services Fund (PXJ), and Consumer Staples Select Sector SPDR Fund (XLP).

In today's mailbag, a question about a benefit for Stansberry's Investment Advisory lifetime subscribers that we mentioned in Wednesday's Digest... and some early feedback on our friend and Chaikin Analytics founder Marc Chaikin's "Power Gauge" system. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I'm not sure yet how to take full advantage of the Global Oil Value Monitor, so when it was referenced in the June 2nd 'The Stansberry Digest' I paid attention. Specifically it claimed that Alan Gula's oil pick in the May edition of the Stansberry's Investment Advisory was one of the top ranked companies in this monitor. That pick... is nowhere to be found in this monitor that I can tell. What am I missing?" – Paid-up subscriber Keith B.

Corey McLaughlin comment: Keith, you're not missing anything... That was my mistake in Wednesday's essay. I should've said that Alan's oil recommendation will be near the top of our Global Oil Value Monitor when we publish its next update. (I've since updated the online version of Wednesday's Digest to reflect this change.)

In short, the Investment Advisory team is revamping the Global Oil Value Monitor to make it even better and more intuitive... And the team will unveil the newest version and details on how to use it next month. Stay tuned for that.

And again, my apologies for the mix-up... One of the last things we want to do is cause more confusion. There's enough of that in the world already.

"I bought into [the] Chaikin Power Gauge during the presentation. I spent time reviewing and found a stock recommended by Power Gauge... and following many teachings from the Stansberry Team, I bought a position and maintain position sizing as the Stansberry team continues to teach us. Since I bought on 5/26, I am up 12.4%.

"If I sold today, my return will just about take care of my investment on Chaikin Power Gauge. I also bought a couple of other recommendations from Marc's list and these 3 stocks will definitely pay for his system. Thanks for a wonderful tool." – Stansberry Alliance member Chris H.

McLaughlin comment: Chris, thanks for sharing... We're happy you've found the Power Gauge useful already. We agree, it's a wonderful tool that every investor should consider using. It's already showing us what most individual investors never get a chance to see – like Wall Street bullishness for energy stocks, for example, as we wrote about Wednesday.

If anyone hasn't yet watched Marc's presentation, you can do so right here.

Good investing,

Dan Ferris
Medford, Oregon
June 4, 2021

P.S. In today's Digest, I shared some of the recent work about AMC from my colleagues and Empire Financial Research editors Whitney Tilson and Berna Barshay. And before I sign off, I wanted to make you aware of a special event that they're hosting in less than a week...

Next Thursday, June 10, at 12 p.m. Eastern time, Whitney and Berna will join forces to reveal a hidden corner of the market that could help you supercharge your portfolio. In short, you could start earning a consistent stream of potential double- and triple-digit gains.

Best of all, this event is absolutely FREE to attend. Whitney and Berna only ask that you save your spot in advance so you don't miss a second of the action. Get started right here.