Forget about EMH, or the efficient market hypothesis. What we need is SMH: the simian market hypothesis.
Under the EMH, market prices of assets like stocks and bonds reflect all available information. Under the SMH, market prices reflect whatever homo mercans—the ape who trades—happens to feel like paying attention to.
Just look at what happened this week at
AMC Entertainment Holdings Inc.,
one of the so-called meme stocks beloved by the individual-investor army that has arisen in the past couple of years.
AMC, the world’s biggest movie-theater chain, has been struggling ever since Covid struck.
In January of last year, a flash mob of individual investors banded together in a buying frenzy that levitated the share price of AMC, which had been on the brink of bankruptcy. Their goal: to create a “short squeeze” that would crush the Wall Street professionals betting against the company, sending AMC’s stock soaring.
These aggressive investors, who call themselves “apes,” drove AMC’s shares up nearly 1,200% in 2021, ultimately enabling the company to raise desperately needed cash and buy more time by selling stock to the public. At the peak, the apes owned more than 80% of AMC.
While the apes were extending the company a lifeline, AMC overplayed its hand, seeking stockholders’ approval to issue up to 500 million new shares. That would have rescued the company from its financial woes—but spread its future earnings over a much larger base, diluting the ownership interest of its investors.
The apes went bananas, protesting on social media until AMC Chief Executive
The apes had won—but AMC was still in the ICU. Earlier this month, the company’s quarterly report warned that it was burning through cash at a pace that is “not sustainable.”
So, thwarted by the apes, AMC did an end run around them.
On Monday, trading began in AMC Preferred Equity units (ticker symbol: APE). AMC Entertainment created them as a special dividend for existing investors, who received one APE unit for each share of AMC they owned. The company had about 517 million common shares outstanding in early August.
Unlike with common stock, AMC could issue the APEs without having to ask for shareholders’ approval again.
Although this first round of APEs raised no fresh capital for the company, AMC can issue up to 483 million more APEs at any time to raise cash, without permission from investors. It may even roll out an additional 4 billion APEs if the board of directors approves that move, again without needing the consent of existing shareholders.
That would get the company the capital it needs to pay down its massive debt and expand its international operations. It would also thin out any future earnings across a far larger base of shares, shrinking the ownership interest of existing stockholders.
“Given the flexibility that being able to issue more APEs will give us, we believe that we would handily be able to raise money if we so choose, which immensely lessens any survival risk,” Mr. Aron said in a conference call on Aug. 4.
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Under the efficient market hypothesis, all this should have severely knocked down the value of AMC and APE shares alike.
In the simian market hypothesis, on the other hand, investors’ moods swing—the same way apes swing from trees.
Before the offering, AMC told investors the APEs were “designed to have the same economic value and voting rights” as the company’s common stock. Subject to a vote of approval by shareholders, each APE will eventually be convertible to one AMC share.
Therefore, the company declared, AMC and APE “should have similar market values.”
Yet, in early trading on Aug. 22, the shares of both AMC and APE shot up until their combined price nearly hit $23, 25% higher than AMC’s closing price the previous trading day.
Then, at the end of that first day, the total market price of AMC and APE shares sank below $16.50. That was about 9% lower than AMC’s final price one trading day earlier.
If AMC ends up issuing hundreds of millions of new APEs, even that discounted price could turn out to be far too high.
One likely reason the market hasn’t fully sorted out the price: Many of the apes remain fiercely loyal to AMC, even though the company’s management has largely bailed out.
In 2020, insiders—senior management and the board of directors—owned only 2.5% of AMC’s stock. They’ve since dumped nearly all their holdings; at this point, insiders own just 0.2% of the company, according to FactSet.
“The retail investors came in and saved the company, while management has been cashing out at their expense,” says Alicia Reese, an analyst who follows AMC at Wedbush Securities.
An AMC spokesman said no one was available to comment this week.
The APEs are good for the company—but are probably bad for the apes. In the end, they’re likely to own a drastically diluted interest in a business that’s no longer at death’s door.
According to the efficient market hypothesis, a company’s stock price is the best estimate of what the business is worth. According to the simian market hypothesis, figuring out what stocks are worth is monkey business.
Write to Jason Zweig at firstname.lastname@example.org
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