Laughing Water Capital recently released its Q3 investor letter (you can download a copy here), discussing its investment thesis on Revlon Inc (NYSE:REV) and other companies. We already covered the fund’s analysis on IES Holdings, Franklin Covey, Redknee Solutions, EZCORP, Iteris, and NOW Inc. in other articles. Let’s take a look at what Laughing Water Capital said about Revlon, a $1.16-billion market cap firm engaged in the business of cosmetics, skin care, fragrance, and personal care, in the letter.
Here are comments from Matthew Sweeney, who runs Laughing Water Capital:
Revlon’s wild ride continues, with shares having traded hands below $16 in mid-September and above $27 in late September. Business value just doesn’t change that quickly absent catastrophic events, but as a stock Revlon is its own animal as controlling shareholder Ron Perelman and the largest independent shareholder, Mittleman Brothers, do battle through SEC filings that seek to influence the supposedly fiduciary minded board of directors. Notably, Mittleman asked for Perelman to agree to not squeeze out minority shareholders for a period of five years. Perelman agreed to not exceed 90% ownership for a (woefully short) one year period.
From our perspective, it is of course frustrating that shares have traded down from ~$35 earlier this year, but they remain drastically under-valued if you are a long term, patient shareholder. Lower prices make Revlon an attractive candidate for tax loss selling, but Perelman’s 1 year standstill agreement had the curious side effect of emboldening short sellers (who are likely hedging debt investments) who no longer have any reason to fear a buyout deal at a premium.
As a result, we are presently earning a ~15%+ yield lending our shares to those who are concerned with short term volatility while patiently waiting for long term value to develop. Getting paid 15%+ to wait for something that I believe may ultimately be worth multiples of its present price helps sooth the pain of our mark to market losses incurred this year.
Founded in 1932, New York City-based Revlon Inc (NYSE:REV) is engaged in selling beauty and personal care products. It has a market cap of around $1.16 billion. For the third-quarter ended September 30, the company reported a loss of $32.4 million, versus a loss of $4.7 million in the prior-year quarter. Adjusted net loss was $19.9 million in the third quarter, compared to adjusted net income of $32.9 million in the same quarter last year. Net sales were $666.5 million, up 10.2% compared to the prior-year period, driven by the acquisition of Elizabeth Arden in a deal valued at $870 million.
Shares of Revlon Inc (NYSE:REV) are down more than 24% so far this year. During the last 12 months, the stock has plummeted 23.97%.
Meanwhile, Revlon is also a favorite stock among the hedge funds tracked by Insider Monkey. There were 19 funds in our database with bullish positions in the company.