Key points:
- The FT quotes the Revlon market price as being “bonkers”
- This might be true, it might not be
- As always the big question is what happens next?
One of the grand mysteries of our time is what the heck people think is going to happen at Revlon (NYSE: REV). Yes, we all do know about meme stocks and Revlon certainly is one of those. But the meme stocks that succeed – succeed here meaning enrich longer term holders – are those which have something more than just being a meme stock. Yes, of course, weight of buying moves prices, that's what starts a meme rally after all. But for it to be sustained there needs to be something else here. And it's not obvious, not at all, that there is anything else there at Revlon. Which is a problem for those bullish of Revlon long term.
As the Financial Times quotes today ““Rightly or wrongly, the market thinks there is value,” he said. “The court could say the market is bonkers, but rejecting markets evidence like that really opens up a can of worms.”” And the thing is the current valuations are bonkers – even as the market is always right about what the market thinks a valuation should be.
As we have pointed out about Revlon stock, and as the FT repeats, the unsecured bonds are trading well, well, below par (around 10% of in fact) meaning that there's simply nothing in there for the equity. Bonds get paid before equity, if the bonds aren't to be fully paid then the equity gets nothing. So the idea that the Revlon equity is worth $400 million, or near $8 a share, is – well, it's bonkers.
Also Read: What Happened To Meme Stocks?
On the other hand meme stocks have in fact worked. The original, GameStop, did so. But that was largely a result of the intense short squeeze which then allowed new capital to be raised. With Ron Perelman owning 83% of the Revlon stock that's not going to happen. Also, even at this price, Revlon's not worth enough to issue enough new stock.
True, Hertz came out of Chapter 11 with value for stockholders. But that was because there was a change in the value of used cars. At the beginning of lockdown that used fleet value slumped, busting Hertz. During the Chapter 11 process used car values rose – the bankruptcy was thus a temporary thing based upon those asset values. That's not going to happen at Revlon either.
That is, two meme stocks which really did work worked for very specific reasons. Reasons that aren't translateable to the Revlon situation. The more appropriate example might well be BBBY. So, meme stock status, price soars. But there's no other there there. There's just that buying on the meme stock status. At which point a large holder sells their stake and the price slumps again. Because a sustained rise in a stock price requires an actual reason, not just speculative interest. There's no BBBY end game so the price is less than sustainable.
Of course, views about Revlon differ. But to believe in the current price, let alone further rises, requires identifying a good and specific reason as to why the equity is worth anything at all. Trading positions have to be based on that first, then any momentum trades that might be possible. For without knowing the end game it's not possible to work out where the momentum is going to go – or when it will stop.