Revlon (NYSE:REV) has been one of this week’s biggest winners. The cosmetics retailer made headlines when it filed for bankruptcy. Wall Street assumed that would be the end of the story, but retail investors were quick to jump in. It didn’t take long for REV stock to start drawing comparisons to GameStop (NYSE:GME).
But as quickly as REV stock shot up, it could already be coming down — despite buyout interest. In fact, Wilton Risenhoover, founder and CEO of market analytics platform Fintel, thinks that it is a short squeeze that will soon be over.
What’s Happening with REV Stock
REV stock’s recent performance doesn’t challenge Risenhoover’s thesis.
In the past five days, shares have surged by more than 200%. That sort of move is always noteworthy. However, Revlon changed course on Thursday, shedding more than 10%. Although shares have rebounded to close out the week, the story is worth scrutiny.
Let’s take a closer look at why Risenhoover sees this as a short squeeze that has run its course.
The Big Short (Squeeze) for Revlon
Risenhoover knows that Revlon’s surge has been driven by retail investors, as evidenced by recent data from Fintel. “The fact that Revlon volume increased significantly in our panel in the last week helps confirm that retail has played a part in this runup,” Risenhoover told InvestorPlace.
It’s clear that retail investor have been drawn to REV stock because its characteristics match those of other meme stocks, like AMC Entertainment (NYSE:AMC) and Hertz (NASDAQ:HTZ). Both are well-known brands that captured retail investor attention. At the time of its own runup, Hertz too was in the midst of filing for bankruptcy protections. But as Risenhoover adds, this type of buying strategy doesn’t yield positive long-term results for investors. As he told InvestorPlace:
In most bankruptcy proceedings, equity owners typically get wiped out and the debt holders take control of the company. With that in mind, anybody still holding equity shares of the company through the legal proceedings is likely to see the value of their investments go to zero. This of course was the reason for the high levels of short interest [in Revlon] going into this squeeze.
Risenhoover is firmly convinced that the short interest that drove REV stock up is already pushing it back down. “In terms of key metrics to track, the level of short interest remains key. As short sellers unwind their positions, pressure will decrease. It is likely that all institutional investors are exiting their positions right now — short sellers at a loss and long sellers at a nice profit.”
What Comes Next
Yesterday, InvestorPlace contributor Joel Baglole predicted that “REV stock could collapse if investors pump and dump it or if a suitor for the company fails to materialize.” Yesterday’s dip shows that things are truly uncertain for the hot stock.
As Risenhoover said, “The most important thing for investors to understand about the current Revlon surge is, to borrow a phrase: ‘the squeeze has squoze.’ Take profits and don’t expect current prices to last.”
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.