Analysis: Meme stock investors bet on Revlon to be the next Hertz – Reuters | Vette Leader

Revlon signage is seen at a Boots shop in London, Britain, on June 16, 2022. REUTERS/Hannah McKay/File Photo

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June 27 (Reuters) – Even for a seasoned meme stock trader like Mike Minutelli, Revlon Inc (REV.N) is a wild bet.

The 30-year-old plumber from Oxford, North Carolina, posted a 350% gain last week by selling half of the shares in the US cosmetics maker he bought after it filed for bankruptcy on June 16. He believes he can earn even more until then by keeping the rest of his shares through the bankruptcy.

Minutelli is dabbling in stocks like GameStop Corp (GME.N) and AMC Entertainment Holdings Inc (AMC.N) — dubbed meme stocks because of their popularity with retail investors. He was heartened by the success individual investors were having with another bankrupt company, Hertz Global Holdings Inc, which defied conventional Wall Street wisdom.

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Individual investors who bought Hertz shares after the company filed for bankruptcy in May 2020 ended up making handsome gains when a group of investment firms offered $6 billion to take over the car rental business a year later.

Minutelli said he hoped the same would happen with Revlon. “If there’s a buyout at a higher price, all the people shorting the stock have to cover their position,” he said, noting that he spent “a couple hundred dollars” betting on Revlon.

A Revlon spokesman declined to comment.

Retail investors’ fascination with Revlon has driven its shares up more than 300% since it filed for bankruptcy 11 days ago. It is unusual for a bankrupt company’s shares to trade in this way, as investors usually fear that their assets will not be sufficient to meet the demands of creditors and suppliers, leaving value to shareholders.

But retail investors, who often connect and organize on social media platform Reddit, were emboldened when those who invested in Hertz got lucky.

Hertz suffered a major blow early in the COVID-19 pandemic when travel was halted and demand for its cars plummeted. But when the company went bankrupt a year later, vaccines were available and travel resumed.

Private equity firms and hedge funds got caught up in a bidding war over Hertz, resulting in a deal that fetched about $8 a share for meme stock investors, most of whom had paid $2 to $5 a share.

Revlon said it was forced to file for bankruptcy not because its products are unpopular but because of supply chain problems, labor shortages and raging inflation.

Investors are hoping that those issues will go away by the end of bankruptcy protection in April 2023 and that someone will step in to buy Revlon and give them a windfall.

“My reason was that Hertz was bought out of bankruptcy, and I think investors will do the same with Revlon,” said Justin Benchtold, a 41-year-old retail worker in Asheville, North Carolina, who bought Revlon stock after its bankruptcy filing.

However, Revlon’s bankruptcy filing said the focus was on restructuring debt rather than seeking a sale.

Robert Rasmussen, a USC Gould School of Law professor and bankruptcy expert, said he’s skeptical that Revlon’s fortunes could take a significant turn to push meme stock investors into the black.

“You need a story that demand for Revlon will suddenly increase so much that the company is now worth more than its outstanding debt. I’m not saying it can’t happen, but I’m certainly not betting on the stock,” Rasmussen said.

PRESSING SHORTS

Private investors are also taking advantage of the strong short interest in Revlon. By buying stocks, investors inflate their value and force those who have been shorting them to buy stocks to close out their positions, leading to further price gains.

Revlon is one of the most heavily discounted stocks. About 46% of the free float is short, up from 38% at the start of the month, according to S3 data.

Aaron Jackson, a 40-year-old former chef in Prince Edward Island, Canada, who is now a full-time trader, said he’s seen retail investors successfully pressure short sellers and wants to make such a profit with Revlon.

“When I saw that this was a recipe for success, I started looking for these stocks that could have a community behind them, like Revlon,” Jackson said.

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Reporting by Angelique Chen and Krystal Hu in New York Additional reporting by Dietrich Knatuh and Saqib Ahmed in New York Editing by Greg Roumeliotis and Richard Chang

Our standards: The Thomson Reuters Trust Principles.

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