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On March 15, 2021, a senior hedge fund analyst was tasked with formulating an investment thesis for AMC Entertainment (AMC). The stock had been highly volatile as the US economy emerged from the COVID-19 pandemic and markets grappled with the pandemic’s impact on future consumer behavior. AMC’s stock price, which had slumped from $7 to $2 at the onset of the pandemic and had been hovering around $4 for months, had skyrocketed to nearly $20 in a few trading sessions in January 2021. There were compelling arguments both for betting on AMC appreciating even further and for betting on its demise. On one hand, investor optimism about the cinema chain was understandable: vaccines were rolling out, and markets were confident in the US economy’s swift return to normalcy. On the other hand, even in the most optimistic scenarios, the $14.04 price at which AMC traded on March 15, 2021, seemed far removed from the company’s fundamentals. To complicate matters, the presence of retail investors betting on “meme” stocks added significant volatility to select stocks, including AMC. This public-sourced case uses fundamental analysis as a starting point for students to explore the mechanics, costs, and risks of short investing strategies. It has been successfully taught at the University of Virginia Darden School of Business in the “Enterprise Valuation” module of “Financial Management and Policies,” a first-year core course in the MBA program. The case has also been used in the first- and second-year elective, “Valuation in Financial Markets.” Since the case covers both valuation methodologies and option pricing, it has also served as a capstone for the first-year core finance course.
The case can be used to pursue the following objectives: Explore the roles played by sentiment and fundamentals in evaluating stock prices, introducing the idea that stock prices can deviate from fundamentals. Highlight how models such as DCF deliver vastly different price-per-share valuations based on different assumptions embedded in the model. Introduce the concept of shorting a stock as a way to take advantage of an overpriced company and understand the risks associated with this transaction type. Clarify the mechanics of option trading and compare the usage of put options to outright shorting a stock, as ways to profit from the expected decrease in a company’s value. Assess the costs and risks of options in comparison to shorting a stock.