Revlon (NYSE:REV) has made an impressive gain over the past few days. The stock price nearly reached $7 after only starting last week at a trading price of $1. What is next for the American cosmetics company?
What is causing the rise in price?
Revlon stock jumped on Friday due to speculation that a conglomerate called Reliance Industries is preparing to make an offer to purchase the business. Revlon said a day earlier that it has filed for Chapter 11 bankruptcy protection due to financial challenges including slowing growth and soaring costs.
Net losses landed at $67M in Q1, noted the company in early May, mainly sue to interest payments on its significant level of debt.
Speculation about a buyout always lead to strong price movements in stocks. Look for example at Twitter, which rose from $39 to $48 overnight as news came out that Elon Musk wanted to take the company private.
More upside or over-priced?
After all, a buyout for Revlon is just speculation. This could lead to a quick pullback in price if the buyout falls through or if the valuation is far below the current price. The current market cap is valued at $330M.
Revlon is struggling under the burden of high debt levels and hasn’t demonstrated an ability to quickly shift its merchandising and supply chain strategies to account for changes in consumer preferences in this phase of the pandemic.
One other factor behind a move up could be a short cover. Many short sellers would have jumped on the decline that happened on June 10th, and rightly so. Bankruptcy fears never go down well for long investors. However, this news has thrown a spanner in the works. How high the price could go is unknown at this point. And what price could be offered is yet to be heard. So for now, short sellers may be covering positions to limit risk on this unknown.
Momentum of this move has now taken the price to $8 in Wednesday’s pre-market. There will be many more day-traders who will move in to capitalise on further upside.
For now, technical levels could be used to anticipate key levels. We think $9-$10 could be reached today. This was a level that saw buyers step in multiple times last year. This level could now be used by short sellers who think a move is over-extended.
There may be some caution needed with this trade. If news comes out of a low offer coming in, the price would drop quicker than most traders could sell. This news could also come out overnight. Due to this, we recommend trading with smaller size to limit your downside. The backside of a trade always comes 10 times faster than the front.
Please read our full disclaimers regarding the information published. The above is intended for informative purposes only and should not be taken as investment advice. Trading on leverage can result in losses larger than your initial deposit.