Revlon/meme stocks: continued speculation hints that bear market is not over

This year’s bear market has not quashed animal spirits just yet. Meme stock investors have returned, snapping up shares of Revlon.

The US cosmetic company, whose nail polishes and lipsticks once filled bathroom cabinets, filed for Chapter 11 protection on June 15. Then the stock traded at just $2.25 — less than a tenth of its pre-pandemic value. That price touched almost $8 on Monday, giving it a market value of over $430mn.

That performance covers up some blemishes. Revlon’s net debt of $3.4bn sits against total assets of $2.4bn, as of the end of March. Revlon should have little equity value given that creditors and suppliers are first in line with their claims.

Instead, Revlon shares should be seen as lottery tickets. And quite a few have changed hands. Daily share volume has surged since mid-June to about 15 times the previous year’s average. Some traders will hope to have snagged the next Hertz.

The car rental group filed for bankruptcy in May 2020. But retail investors who bought the shares subsequently ended up with a tidy return after the company accepted a takeover bid that gave shareholders a rare payout. Might Revlon surprise the market?

Think again. A quick vaccine rollout and the return of travel did fuel a sudden turnround in car rental demand. No similar scenario exists for Revlon. Unlike car rentals, dominated by a handful of companies, there is no shortage of groups flogging make-up. Although revenues at Revlon rose last year following three straight years of declines, it remained in the red — not the sexy kind.

As in past meme swarms, such as that for GameStop, a jump in short positions for Revlon may have attracted day traders keen to force those sellers to buy back. Yet GameStop shares are down 40 per cent over the past year. Revlon investors can take comfort that at least the cost of entry was low. Others might ask if this lingering excess of speculative energy proves the US stock market has not touched bottom.