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Investors In Meme Stocks Believe Bankrupt Revlon Will Become The Next Hertz

Investors In Meme Stocks Believe Bankrupt Revlon Will Become The Next Hertz
Revlon Inc is a risky bet even for a seasoned meme stock trader like Mike Minutelli.
The 30-year-old plumber from Oxford, North Carolina, made a 350% profit last week by selling half of the shares in the US cosmetics company he purchased after it filed for bankruptcy on June 16. He believes he can make even more money by holding on to the remainder of his shares throughout the bankruptcy.
Minutelli invests in companies such as GameStop Corp and AMC Entertainment Holdings Inc, which have been termed meme stocks because their appeal among retail investors. He was encouraged by individual investors' success with another insolvent company, Hertz Global Holdings Inc, which bucked Wall Street's conventional wisdom.
Retail investors who bought Hertz shares after it filed for bankruptcy in May 2020 ended up with handsome profits when a group of investment firms offered $6 billion a year later to take over the car rental firm.
Minutelli said he hoped the same would happen with Revlon. "If there is a buyout at a higher price, then all of the people shorting the stock have to cover their position," he said, noting he had spent "a few hundred dollars" to bet on Revlon.
Retail investors' fascination with Revlon has pushed its shares up by more than 300% since it filed for bankruptcy 11 days ago.
It is unusual for a bankrupt company's shares to trade in this manner since investors typically fear that the company's assets would be insufficient to meet creditors' and suppliers' claims, leaving equity holders with nothing.
However, retail investors, who frequently trade ideas and organise on the social media platform Reddit, were encouraged when those who invested in Hertz were successful.
When the COVID-19 pandemic hit, travel was halted and demand for Hertz vehicles fell precipitously. However, by the time the company filed for bankruptcy a year later, vaccines were available and travel was resuming.
Private equity groups and hedge funds competed over Hertz, resulting in a deal that paid nearly $8 per share to ordinary stock owners, the most of whom had paid $2 to $5 each share.
Revlon has stated that company was compelled to declare bankruptcy due to supply chain challenges, workforce shortages, and rampant inflation, not because its products are disliked.
The investors are hoping that by the time Revlon's bankruptcy protection expires in April 2023, these issues will be resolved and they will receive a windfall.
"My rationale was that Hertz got bought out of bankruptcy, and I think investors will do the same thing with Revlon," said Justin Benchtold, a 41 year-old retail sector worker in Asheville, North Carolina, who bought Revlon shares following its bankruptcy filing.
However, Revlon's bankruptcy declaration stated that the company's priority was debt restructuring rather than negotiating a sale.
A bankruptcy expert, USC Gould School of Law professor Robert Rasmussen, said he was sceptical that Revlon's circumstances would improve much enough to put its stock holders in the black.
"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 certainly not betting on the stock," said Rasmussen.
Retail investors are also taking advantage of Revlon's high short interest. By purchasing shares, investors raise their value, forcing those who have shorted them to buy stock to close their positions, resulting in further price gains.
One of the most heavily shorted stocks is Revlon. According to S3 data, almost 46 per cent of its free float is sold short, up from 38 per cent at the beginning of the month.
Aaron Jackson, a 40-year-old former cook from Prince Edward Island, Canada, who is now a full-time trader, said he had seen regular investors successfully squeeze short sellers and hoped to do the same with Revlon.
"When I saw that was a winning formula, I started looking for these stocks that could rally a community behind them, like Revlon," Jackson said.

Christopher J. Mitchell

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