Shares of bankrupt cosmetics company Revlon Inc. soared 15% Tuesday, swept up in another wave of ‘meme-stock’ buying by retail investors, excited to learn that Morgan Stanley had increased its stake in the company in the last quarter.
Morgan Stanley purchased 400,650 shares in Revlon
REV,
according to the company’s 13-f filing with the Securities and Exchange Commission on Monday.
The news boosted hopes that investors may benefit from buying the bankrupt company’s stock in the way that investors in Hertz Inc.
HTZ,
managed to do when the car-rental company filed for Chapter 11 in May of 2020.
Typically in a bankruptcy, a company’s stock becomes almost worthless as the creditors who stand above the shareholders in the capital structure have the first claim on assets.
But Hertz, which had been hit hard by the grounding of travel during the pandemic, was eventually rescued by a group of investors led by Knighthead Capital Management and Certares Management, who put up $5.9 billion in capital on a bet that the travel rebound would eventually benefit the company.
See now: Hertz Raises $1.3 Billion in ‘Re-IPO.’ The New Stock Will Start Trading Soon.
That allowed Hertz to greatly reduce its massive debt burden and line up other financing, just as the market for rental cars heated up.
Revlon had filed for bankruptcy in June after posting a first-quarter loss of $63.1 million that made it impossible to service long-term debt that totaled $3.31 billion at the time.
The stock quickly became part of the meme trade driven by individuals gathering on the Reddit forum WallStreetBets, who were discussing its recent performance on Tuesday.
Short interest, or bearish bets on Revlon’s stock, represented 35.6% of the public float, or shares available for public trading, according to the latest exchange data. That compares with the 47.2% of the shares of fellow meme stock Bed Bath & Beyond Inc. that are shorted, and the 18.4% of AMC Entertainment Holdings Inc.’s public float that are shorted.
There are no guarantees that Revlon will enjoy the success of Hertz, however.
“Investors should understand that buying common stock of companies in Chapter 11 bankruptcy is extremely risky and can lead to financial loss,” according to the Financial Industry Regulatory Authority, or FINRA.
Also, when a public company emerges from bankruptcy, the old shares are often canceled, and only the reorganized company’s new shares end up having value.
Revlon shares have gained 109% in the last three months.
Other meme stocks were also higher Tuesday. AMC Entertainment Holdings Inc.
AMC,
was up 6%, GameStop Corp.
GME,
was up 11% and Bed Bath & Beyond Inc.
BBBY,
was up a staggering 65%.
Read More: Shares of bankrupt Revlon soar 17% as investors cheer news that Morgan Stanley purchased