Short sellers know you stayed home watching Netflix instead of going to the movies last night. And they're making wagers to profit from that very fact.
They have boosted short interest -- a measure of bets that share prices will drop -- in the four largest North American movie theatre chains to the highest in years, according to data compiled by IHS Markit. That group includes Regal Entertainment Group, AMC Entertainment Holdings, Cinemark Holdings and Cineplex.
At the core of their bearish wagers is a declining movie-going audience -- one that's shifting towards digital streaming and shunning the blockbuster fare that had been such a reliable driver of box office returns for so long.
In 2016, US moviegoers bought about 38 million fewer tickets than the previous year, causing total box office receipts to decline by $US36 million, despite the average ticket price increasing by 2.6%.
The slowdown is even more pronounced amongst millennials. The audience of 18-to-39-year-olds declined for five straight years through 2015 before ticking slightly upward in 2016, according to the Motion Picture Association of America.
At the root of the slowdown is how the general population -- particularly millennials -- now consume their entertainment. With cord-cutting on the rise, they have already shown a willingness to eschew traditional cable in favour of streaming services like Netflix and Amazon. Now they're hurting your local cineplex too, and traders have noticed.
"Movie theatre stocks are some of the least rewarding assets to own right now," said Simon Colvin, an equity and credit markets analyst at data provider IHS Markit. "The industry's ability to keep drawing audiences -- and its wider relevance in a highly competitive landscape -- is now under question. An increasing number of short sellers are vying to enter this horror show."
For an indication of just how seriously film studios are taking the shifting dynamics of the movie industry, look no further than Disney's recently-announced standalone streaming service. The entertainment juggernaut is removing its films from Netflix to build its own platform.
It's a classic case of "if you can't beat 'em, join 'em," and it's just the beginning of the war for your eyeballs.
Here's a more detailed look at the big bets being made by short sellers against Regal and AMC, the two biggest movie theatre chains in the US:
While Regal has outperformed its peers in recent months, that relative strength has made it the most popular target in the movie theatre industry for short sellers. It currently has more than 15% of its shares on loan, while the demand to borrow Regal's shares has surged by more than 50% in the last three months, according to IHS Markit.
While AMC has 5.6% of its shares on loan, the highest in at least three years, the demand to short the company is actually even higher, says IHS Markit. Since the majority of the company's shares are held by shareholder Dalian Wanda Group, the portion of the AMC's free float being short is higher than it appears.