The stock market is a paradox wrapped in an irony. On the one hand, it’s a powerful wealth-building tool, offering you the chance to invest in outstanding businesses and ride on great managers’ coattails.
On the other hand, it can be like a frenzied casino, with stock tickers flashing like cards on a blackjack table.
There has been an increase in this casino-like atmosphere in recent months. In just one month, Gamestop’s shares soared by 384% and AMC’s by 177%.
All this because of a single tweet from the face of Wall Street Bets, announcing his return.
With its inflated share price, AMC was able to capture the opportunity amidst this craze and raise capital. A total of 72.5 million shares were sold at $3.45 per share, raising $250 million as new equity capital.
I’m not quite sure how finance professors can continue to teach the deeply flawed efficient market hypothesis with a straight face, which claims that stock prices always reflect all available information, implying that they’re perpetually traded at fair value.
Take a look at Gamestop’s operating profits over the past nine years:
2015: $930,000
2016: $820,000
2017: $750,000
2018: $550,000
2019: -$10,000
2020: -$540,000
2021: -$830,000
2022: -$820,000
2023: -$80,000
In spite of closing numerous stores since 2016 and raising an astonishing $1.1 billion during the 2021 meme stock frenzy, the average Gamestop store continues to lose $80,000 per year.
Based on the company’s market cap of $14.9 billion and its 4,169 stores, each store is valued at about $3.6 million, which is a steep price to pay for a bleeding asset.
Do you think it makes sense to invest $3.6 million on a store that loses $80,000 per year?
Let’s now talk about AMC’s operating profits per theater:
2016: $307,395
2017: $205,523
2018: $307,455
2019: $233,665
2020: -$3,111,928
2021: -$901,505
2022: -$411,170
2023: $36,637
Latest: $35,866
AMC theaters generate an average of $36,000 in operating profits each year. With a market cap of $2 billion and 895 theaters, each is valued at $2.3 million.
Does it make sense to pay $2.3 million for an asset that generates only $36,000 per year?
Now that the Treasury Bill rate is 5%, $2.3 million can get me $115,000 without me selling a single ticket, taking any risk, or lifting a finger.
At the risk of sounding like a broken record, the stock market is simply a tool—we can either think rationally like business owners or dance with the crazies in the market.
If you are reading this… I hope you choose the former and commit to the steady compounding of wealth in the stock market. And if any of your friends are tempted to dance with the crazies, send this to them.
Invest rationally,
Thomas