Revlon stock keeps squeezing – What is going on?

• Revlon filed for Chapter 11 bankruptcy last week.
• Since then REV stock is up over 400% and counting.
• Is this another potential Hertz deal?

Revlon (REV) stock was higher yet again on Wednesday, marking the sixth straight day of gains since filing for Chapter 11 last week. Chapter 11 of the United States Bankruptcy Code allows for the reorganization of a company's business subject to approval by a federal bankruptcy court. A chapter 11 can result in a reorganization of the business or a chapter 7 sale of assets as the business is wound down. In chapter 11 the company is largely in control of the process subject to approval from the bankruptcy court. Usually, if the business is to continue, then its capital structure gets covered, resulting in more equity and less debt and meaning writedowns for debt holders and in some cases a complete wipeout for equity holders or severe dilution. 

Also read: Walmart Deep Dive Analysis: Hold WMT to play defense vs upcoming US recession

Revlon filed for Chapter 11 on June 16.

Revlon stock news

Since the chapter 11 filing last week, REV stock has moved from $1.25 to nearly $10 at the peak of Wednesday's trading, a move of over 600%. Given that we are familiar with chapter 11 bankruptcy and the strong possibility that equity holders get wiped out, why the sudden sharp move higher?

There is a multitude of possibilities. First, it is possible that the earlier part of the move was caused by short positions closing their trade. Not a short squeeze then but rather opportunistic position closing. Chapter 11 can drag on, so it is far better to close a highly profitable trade and move on. Once the REV stock moved higher though, it is unlikely we got much chasing to close positions above $2 to $3. The amount of volume trading in Revlon shares also noticeably spiked higher.

News that an Indian conglomerate could be interested in buying Revlon certainly added to the move higher as did the company securing a loan of $375 million to keep the business running. Last week ETNow reported that Reliance Industries may be interested in Revlon. Reliance owns the Glimmer cosmetics brand, so it does have experience in the sector. Also last week the bankruptcy judge presiding over the case approved an additional loan of $375 million to keep Revlon operational in the short term. Investors may be eyeing a similar reaction two years ago from Hertz filing for Chapter 11. We believe this situation is not as optimistic. Hertz was a pandemic victim, and Revlon is not. Once the pandemic came to an end, Hertz was always likely to have some form of business, Revlon may not. 

Revlon stock forecast

This will take quite some time to drag to a conclusion as Chapter 11 cases do. In the meantime, some pessimism is likely to return to the stock or realism. That may already be evident from the low relative close on Wednesday. Revlon spiked up to $9.89 before closing lower at $8.14. This is often a signal of falling momentum. 

REV stock chart, daily