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Analysis: Meme stock investors are betting bankrupt Revlon will be the next Hertz

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

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

The 30-year-old plumber from Oxford, North Carolina, made a 350% profit last week selling half of the shares of the US cosmetics maker he bought after it filed for bankruptcy on 16 June. He thinks he can do even more by keeping the rest of his shares during the bankruptcy.

Minutelli dips into stocks such as GameStop Corp (GME.N) and AMC Entertainment Holdings Inc (AMC.N) – dubbed meme stocks because of their popularity with retail investors. He was emboldened by the success individual investors have had with another bankrupt company, Hertz Global Holdings Inc, which defied conventional Wall Street wisdom.

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Retail investors who bought Hertz shares after it filed for bankruptcy in May 2020 found themselves with handsome profits when a group of investment firms offered $6 billion a year later to take over the rental company of cars.

Minelli said he hopes the same will happen with Revlon. “If there is a buyback at a higher price, then everyone shorting the stock has to cover their position,” he said, noting that he had spent “a few hundred dollars” to bet on Revlon.

A Revlon spokesperson declined to comment.

Retail investor fascination with Revlon has driven its shares more than 300% since filing for bankruptcy 11 days ago. It is unusual for the shares of a bankrupt company to trade in this way, as investors generally fear that its assets will not be sufficient to settle the claims of creditors and suppliers to leave shareholders with any value.

But retail investors, who often brainstorm and organize on social media platform Reddit, were emboldened when those who invested in Hertz lucked out.

Hertz took a hit early in the COVID-19 pandemic when travel was halted and demand for its cars plummeted. But by the time the company emerged from bankruptcy a year later, vaccines had become available and travel was reopening.

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

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

Investors are hoping these issues will go away by the time its bankruptcy protection ends in April 2023, and someone will swoop in to buy Revlon and offer them a bargain.

“My reasoning 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. Nord, which bought Revlon shares after its bankruptcy. deposit.

Revlon’s bankruptcy filing, however, said it was focused on restructuring debt rather than pursuing a sale.

USC Gould Law School professor Robert Rasmussen, a bankruptcy expert, said he was skeptical that Revlon’s fortunes could change significantly to put even stock investors in the dark.

“You need a story that all of a sudden demand for Revlon is going to increase to such an extent that the company is now worth more than its outstanding debt. I’m not saying it can’t happen, but I’m definitely not betting on the title,” Rasmussen said.

TIGHTENING SHORTS

Retail investors are also tapping into the strong short-term interest in Revlon. By acquiring shares, investors increase their value, forcing those who sold them short to buy shares to close out their positions, leading to further gains in the price.

Revlon is one of the most shorted stocks. About 46% of its float is sold short, down from 38% at the start of the month, according to S3 data.

Aaron Jackson, a 40-year-old former chef from Prince Edward Island, Canada, who is now a full-time trader, said he has seen retail investors succeed in squeezing short sellers and was looking to achieve such a win with Revlon.

“When I saw this was a winning formula, I started looking for those stocks that could rally 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.