When the pandemic first began, people went to any lengths to stay at home – as much as they could. It was safer. And the comfort of streaming entertainment was only a click away...
But these trends almost killed the American movie theater.
Cinema giant AMC Entertainment (AMC) saw revenue crash more than 90% in the third quarter of 2020. Viewership fell by the same amount in the following quarter. The company was facing bankruptcy...
Then, a December stock offering helped send its share price through the roof.
The theater chain raised $506 million from retail investors. The stock hit meme status. allowing it to raise more than a billion more dollars throughout 2021. And it all ensured the cinema would stay open for another day...
Now, it seems that money has been burning a hole in AMC's pocket. The company made a surprise investment last week. And with it, the movie-theater chain has become the absolute worst way you could invest... in gold.
Let me explain...
Last Tuesday, AMC made an apparent impulse buy.
It spent $27.9 million to acquire a 22% stake in Hycroft Mining (HYMC). Hycroft is a junior gold miner holding a 70,000-acre deposit in Northern Nevada.
The story may sound unlikely, and maybe even a little harebrained. But it's true.
AMC is now a one-stop shop. The stock offers exposure to the movies... and now, to gold.
In a broad sense, AMC was wise to buy into the trend. Frankly, it's a great time to be long gold.
The metal is only about 5% off its all-time high. We can credit this rally to soaring inflation... or maybe the new era of geopolitical uncertainty. Whatever the reason, investors are fleeing to safety. At times like these, gold often soars.
But whatever its business goals might be, AMC seems to be missing a crucial point... Gold miners are some of the riskiest long-term investments you can make.
That might sound controversial. But it's a fact...
The Philadelphia Gold and Silver Index (XAU) is the benchmark gold miners index. It includes 30 high-profile precious metals miners.
In the last 35 years, this index has returned nearly 45%. Meanwhile the S&P 500 Index has soared more than 2,850.
To be fair, you can make a lot of money in quality miners at the right time. But most companies aren't quality... And most times aren't right. It's a tough business.
This reason is the hyper-cyclical nature of gold mines. Every mine eventually runs out of gold. When that happens, you've got to find a new one, and develop it at a huge cost.
In Hycroft's case, the company fell into a major liquidity crisis. It had only $12.3 million in cash... Yet it carried $159 million in debt. That's a big part of why AMC could buy so much of Hycroft so cheaply.
Now, it's worth noting that commodity tycoon Eric Sprott matched AMC's stake out of his own pocket. Maybe there's more to Hycroft than meets the eye.
But the bigger question is what this means for AMC...
It still seems to be a movie-theater chain. But now, it's also a mezzanine fund... Or a gold speculator? Perhaps its new mission is to rehabilitate struggling businesses. AMC's CEO Adam Aron has gone so far as to comment that Hycroft's liquidity crisis is a lot like what AMC experienced...
But instead of making acquisitions, it might be a better idea for AMC to pay down its almost $11 billion debt load. Tacking a bad business onto a bad business is rarely a recipe for success.
The cinema mogul's game plan is unclear. But one thing is certain...
The only commodity play worse than a struggling junior miner... is the entertainment company that bought one on a whim.
Good investing,
Sean Michael Cummings
P.S. When gold booms, the right gold stocks can absolutely soar. But you need to make sure you avoid the duds – and invest in the best companies in the business.
Our colleague John Doody has an incredible track record in the industry. He's behind the only gold strategy we've seen that has delivered audited gains of 1,033% from 2001 to 2021... drastically outperforming gold's 560% and the S&P 500's 443%. And right now, he's sharing the best way to profit as gold breaks out... Check out the details here.
Further Reading
Despite AMC's strange impulse buy, one thing is true... The conditions are right for investing in gold. John Doody explains the forces that are lining up in gold's favor today right here: The Two Key Factors That Will Drive Gold Higher.
"Right now, gold is coming off a new 52-week high," Chris Igou says. History tells us that's an important signal... one that could lead to more upside over the next year. Read more here: Gold's Rally Is Just Beginning.
It's easy to make a mistake in the stock market, whether it's buying at the top or selling at the bottom. But investors must grapple with another issue too...
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
AbbVie (ABBV)... pharmaceuticals
Bristol-Myers Squibb (BMY)... pharmaceuticals
Eli Lilly (LLY)... pharmaceuticals
Regeneron Pharmaceuticals (REGN)... pharmaceuticals
McKesson (MCK)... health care
Anthem (ANTM)... health insurance
Centene (CNC)... health insurance
Travelers (TRV)... insurance
W.R. Berkley (WRB)... insurance
Assurant (AIZ)... insurance
Steel Dynamics (STLD)... steel
Westlake (WLK)... chemicals
Deere (DE)... farm equipment
Weis Markets (WMK)... grocery stores
Dollar Tree (DLTR)... discount retailer
NEW LOWS OF NOTE LAST WEEK
Nuveen Municipal Value Fund (NUV)... muni-bond fund
Alibaba (BABA)... Chinese e-commerce platform
Peloton Interactive (PTON)... e-fitness fad
