An Extremely Risky Meme Stock That’s Not Quite Outrageous
Usually, when a public company files for Chapter 11 bankruptcy protection, it is a sign to move on to other investment projects. However, with cosmetics giant Revlon (ROUND), the company unwittingly attracted positive attention from meme-stock traders. Although the account is terribly treacherous, it is not completely unfounded. I am neutral on REV stock.
To be clear from the outset, REV shares are not suitable for the overwhelming majority of investors. Whenever bankruptcy proceedings are invoked, market participants usually ask for trouble. It boils down to a very basic logic: if a company was operating decently enough, such a desperate decision would not be necessary.
After all, while bankruptcy protection has its benefits — namely, staying in business — the process comes with significant costs, such as myriad filing and attorney fees. Moreover, the company concerned may be hanging on for several years, paying off its debt, which can sometimes lead to massive sacrifices, such as the sale of assets.
Unfortunately, Revlon may not have had much choice in the matter. Management primarily cited liquidity constraints resulting from global supply chain disruptions and rapidly rising inflation as the cause of the bankruptcy.
However, the company has also suffered from a competitive onslaught, particularly from celebrity-backed cosmetics. Faced with external and industry-specific headwinds, Revlon saw few options available.
Nonetheless, the incredible downtrend caught the attention of meme stock traders, who saw another opportunity to disrupt Wall Street bears. To be completely honest, the REV stock story isn’t 100% speculative (although it could be at least 90%).
Revlon Smart Score Assessment
On TipRanks, REV stock scores 5 out of 10 on the Smart Score spectrum. This rating indicates that the stock is not too likely to outperform the market going forward.
The Crazy Bullish Narrative for REV Stock
Again, with the caveat that REV stock is not appropriate for most market participants, the underlying “investment” is not completely devoid of a fundamental catalyst. Certainly, the COVID-19 pandemic has pushed this struggling business into the depths of Sheol. Although not intuitive, it is also the global health crisis that could offer Revlon a very good chance of becoming a phoenix.
Essentially, the framework boils down to incentivizing self-care and beauty in a post-pandemic paradigm. According to data from the American Psychological Association, a February 2021 survey found that 42% of American adults reported unwanted weight gain. Among this cohort, the average weight gain was 29 pounds.
Naturally, work-from-home initiatives and government mandates created an environment that allowed for a sedentary lifestyle. Additionally, replacing face-to-face meetings with emails and conference calls meant worker bees could conduct their operations in their pajamas.
In this ecosystem, it’s no surprise that REV stock has suffered. Indeed, if you look at its five-year price chart, you will notice that REV has never come close to challenging its pre-pandemic trading levels.
However, a growing number of high profile companies are expressing concerns that working from home privileges are leading workers to abuse these privileges. Assuming companies start calling their employees back to the office, the demand for beauty care could grow exponentially, benefiting investments like REV stocks.
A big mess otherwise
To sum up the long-term bullish narrative for REV stock, the underlying company’s bankruptcy protection record gives the company time. Obviously, his main priority is to consolidate his financial profile. However, the time element could be constructive if, for example, companies ramp up requests for their workers to return to the mothership.
Still, anyone uncomfortable with the high probability of losing money should be wary of REV stocks. While giving maximum respect to the memestock community for causing sweeping reversals in struggling organizations in the past, Revlon’s challenges are serious.
One of the biggest problems within the cosmetics firm is its balance sheet, which is frankly awful. Its cash-to-debt ratio barely registers above zero, ranking worse than about 94% of companies in the consumer packaged goods sector. Additionally, its debt to EBITDA multiple is over 12.5x, well above the median multiple of 2.4x within the industry.
In the income statement, Revlon posted revenue of $2.08 billion in 2021, a gain of more than 9% over the prior year’s result. However, the tally is lower than the annual sales recorded between 2016 and 2019.
More problematically, Revlon hasn’t posted a positive net profit since 2015. So if the aforementioned bullish narrative is to materialize, it needs to do so fairly quickly.
Wall Street’s view on REV stocks
According to TipRanks analyst rating consensus, REV is a Hold, based on no buy, hold and no sell rating. The average Revlon price target is $8.50, implying an upside potential of 47.83%.
The takeaway: REV Stock is for the bold
For being totally open and transparent, the REV stock is only suitable for the bold. Usually, shareholders of bankrupt companies are wiped out once new shares are issued after the bankruptcy. This is a good warning sign not to get involved with Revlon.
However, for those who don’t want to take a trip to Las Vegas but still want to gamble, REV stock might offer some entertainment value. That’s because the narrative supporting Revlon isn’t entirely based on ridiculous memes.