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Why Revlon More Than Doubled This Week

What happened

Showing there is no stock so distressed that meme stock traders won't pile into it, shares of Revlon (NYSE: REV) rocketed 113.1% higher this week compared to where they closed last Friday, according to data from S&P Global Market Intelligence, after the cosmetics giant filed for bankruptcy.

Traders on Reddit see parallels with another big bankruptcy, Hertz Global Holdings (NASDAQ: HTZ). The car rental outfit's stock plunged to $0.56 per share upon its bankruptcy filing, but subsequently soared 1,000% within just a few weeks. And because there are very few Revlon shares to trade, but over one-third of them are sold short, traders are looking to ignite a massive short squeeze.

Image source: Getty Images.

So what

Revlon has been around for nearly a century, meaning it's gone through recessions, wars, depressions, and pandemics, but current economic conditions were a perfect storm of calamity for the cosmetics company. Supply chain snarls put key ingredients in short supply and inflation battered it about the head, which, when combined with labor shortages, conspired to make it impossible to continue.

By filing for a Chapter 11 bankruptcy, Revlon will be able to get the breathing space necessary to repay its creditors the $3.3 billion in debt it owes while continuing to operate.

It's because Revlon owns well-known brands such as Elizabeth Arden, Almay, and Cutex, not to mention the Revlon name, that traders see a very good possibility for a rebirth.

Now what

There are more than 54 million Revlon shares outstanding and chairman Ron Perelman owns 85% of them, or some 46 million shares. That leaves precious few available for retail investors, particularly with anywhere from 33% to 37% of them (depending upon who's counting) sold short.

By buying up the stock of the bankrupt business, traders are looking for a turnaround similar to what occurred with Hertz, which was able to pay off its bondholders in full and resume business in a more favorable market.

However, Barron's contends the situations are not similar, as Revlon's bonds are trading at literal pennies on the dollar, suggesting a high degree of pessimism among bondholders that they will recoup their money.

The so-called Lipstick Effect, in which cosmetics companies shine during economic downturns because consumers allow themselves to spend on affordable luxuries, doesn't seem to be at play here. And Revlon's sudden surge may really just be putting lipstick on a pig.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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