What happened
Revlon (REV) shareholders underperformed the market through Thursday trading this week. The cosmetics specialist's stock was down 13% compared to a 1.4% drop in the wider market, according to data provided by S&P Global Market Intelligence.
The move pushed the meme stock deeper into negative territory in 2022, down over 50% so far. It was sparked by volatile swings in the debt markets, which Revlon needs to tap as it works through its bankruptcy and restructuring programs.
So what
Interest rates continued rising this week and markets fell as investors became more pessimistic about the economy's short-term prospects. These negative trends threaten Revlon's rebound hopes, which rely on both growing demand for cosmetics and easy access to affordable credit.
The company is working to pay existing creditors today while seeking additional capital to help fund its business through the critical holiday shopping season.
Now what
Revlon is also a heavily shorted stock, meaning that many investors have taken a bearish position on its business. That factor can amplify moves in the stock during turbulent periods in the market like the one that investors endured this past week. It can also power unusually quick moves higher during any shift in investor sentiment.
Revlon's cloudy operating future should convince most investors to stay far away from the stock. Even if the company manages to stem its market share losses, it isn't clear that it will ever return to a path of sustainably positive earnings. As a result, investors shouldn't be surprised to see further down weeks ahead.
There are more attractive growth stocks in this space, including Ulta Beauty, which is steadily growing sales while improving its already strong profitability. Investors should look toward successful businesses like that and avoid speculating on highly risky stocks like Revlon.
