Why Is Jim Chanos Betting Against Red-Hot AMC Stock?

AMC (NYSE:AMC) stock is in full focus after acclaimed investor Jim Chanos announced that he had opened a short position in the movie theater chain. However, Chanos also announced that he had purchased shares of AMC Preferred Equity Units (NYSE:APE), resulting in an arbitrage trade. An arbitrage strategy is used when an investor seeks to exploit price differences in the same or identical assets.

Shares of APE stock began trading earlier this week on the New York Stock Exchange (NYSE). Anyone who purchased shares of AMC before August 22 also received one unit of APE. Each APE unit carries the same voting rights as a share of AMC and there are 516.82 million APE shares outstanding, the same number of AMC shares outstanding. AMC noted that the initiation of APE would “be similar to a 2/1 stock split.” CEO Adam Aron added that an investment into AMC before the APE dividend was issued is worth the combination of an AMC share and an APE unit.

With that in mind, let’s dive into Chanos’ arbitrage trade.

Jim Chanos Bets Against AMC Stock, Goes Long APE Stock

The Kynikos Associates founder believes that APE and AMC should trade at the same or roughly the same price. Today, shares of AMC closed at $9.56, while APE closed at $7.02, marking a significant 36% difference. However, in the event of a bankruptcy, APE shareholders are ahead of AMC shareholders for payouts because of their preferred share status.

In addition, APE units could possibly be converted into AMC shares in the future, pending board proposition and shareholder approval. Chanos explained:

Functionally, the two securities are the same. And I’d guess the apes will be putting pressure on Mr. Aron, if the discount continues, to make it freely convertible sooner rather than later.

B. Riley analyst Eric Wold seems to agree. Wold believes the two classes of equity should trade at relatively similar prices because they have “equal economic value and voting rights.”

This isn’t the first time that Chanos has taken a short position against AMC. In August of last year, he disclosed a short position and scolded retail day traders, warning them that they would be personally responsible for any losses incurred when trading meme stocks.

On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Eddie Pan specializes in institutional investments and insider activity. He writes for InvestorPlace’s Today’s Market team, which centers on the latest news involving popular stocks.

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