What happened
Shares of Revlon (REV) the cosmetics company that filed for bankruptcy protection only two months ago, made a big move today, soaring 30.6% after Morgan Stanley (MS 0.20%) made a surprise investment in the company.
So what
Revlon shares have surged over the two months since the company's filing, as meme stock traders like those on Reddit's WallStreetBets forum seem to hope they can pull the same trick they did with Hertz, the rental car company that filed for bankruptcy protection in 2020, shortly after the pandemic struck. Traders bid Hertz shares higher and eventually got a handsome payoff when the company was bought out by private equity firms in 2021.
Today, Revlon investors got a boost from news that Morgan Stanley, the investment banking giant, purchased around 400,000 shares of the beaten-down cosmetics stock during the second quarter.
It wasn't clear when Morgan Stanley made its purchase, but the investment bank may have been making the same bet that a lot of the meme stock traders were, driving the stock higher in hopes of rescuing it from bankruptcy.
Additionally, Revlon's recent rally, which has carried it up 700% over the past two months, has been fueled in part by a short squeeze as 35% of the float was sold short as of July 29.
Now what
Revlon, which owns brands like Elizabeth Arden and Almay, has some similarities to Hertz in that its a well-known consumer brand that could hold value to a potential buyer.
As the company's second-quarter earnings report shows, Revlon continues to struggle, with revenue down 11% to $442.6 million. However, it did report positive adjusted operating income and earnings before interest, taxes, depreciation, and amortization, indicating the business isn't entirely broken. It did lose $49 million in free cash flow, showing it going deeper into debt.
Whatever happens next to the stock will likely be separate from what happens to the company, but having Morgan Stanley's backing could help Revlon secure a favorable deal to get out of bankruptcy protection.
