Revlon (REV) Has Fallen 72% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Mittleman Brothers top stock picks. Mittleman Brothers, an investment management firm, is bullish on Revlon Inc (NYSE:REV) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Revlon Inc (NYSE:REV) stock. Revlon Inc (NYSE:REV) is a cosmetics company.

In August 2019, Mittleman Brothers had released its Q2 2019 investor letter. Revlon Inc (NYSE:REV) stock has posted a return of -72.3% in the trailing one year period, underperforming the S&P 500 Index which returned 16.1% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Revlon Inc (NYSE:REV) stock has fallen by 68.4%.

In Q2 2019 investor letter, Mittleman Brothers said the Mittleman Global Value Equity Fund – Class P posted a return of -4.6% in the second quarter of 2019, underperforming the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Mittleman Brothers about Revlon Inc (NYSE:REV) stock in the Q2 2019 investor letter.

“Ronald Perelman (Revlon’s largest shareholder via his holding company, MacAndrews & Forbes Incorporated) was an active open market buyer of Revlon in Q2 2019 (at prices as high as $23.75). This brings his YTD purchases to over 875K shares and total ownership to 87%. Once again, MIM believes the worst-case scenario here to be a tender offer that is well above the current stock price.

MIM’s minimum estimate of fair value is in the mid-$40s vs. Revlon’s $19.33 stock price at the end of Q2 2019.

MacAndrews & Forbes extended its standstill agreement on 21 September 2018 for another year, which was initiated at MIM’s prodding in September 2017. Even though the agreement expires soon, it seems highly unlikely that Perelman will reach 90% ownership (the threshold required to do a short-form merger) through open market purchases . Of the 13% of the shares outstanding that Perelman doesn’t own, MIM controls roughly 4.3%, index funds ~4%, and ~2% is in the hands of other informed value investors, leaving only 2-3% of shares theoretically available for purchase in the open market.

A tender offer is more likely. However, a tender would be contingent upon approval by a majority of the minority shareholders held by non-Perelman entities. That path is unlikely to work unless a fair price is offered.

Most notably, Revlon’s business is showing encouraging signs of the turnaround that MIM has been anticipating, while higher priced new entrants (like Anastasia Beverly Hills) are starting to see sales slip. As Revlon’s margins normalise and total sales return to growth, free cash flow should return with a vengeance and the deleveraging that ensues should rapidly accrue to equity value.

About 2.5 million shares remain short, which is more than the tradeable float. The bonds have rallied CYTD while the stock has languished. There is just one equity analyst covering the stock. But there is more comprehensive research coverage on the debt, and those analysts appear to appreciate the deleveraging story underway and the fundamental improvement in the business.

It is also not lost on MIM that the best performing S&P500 stock in the first half of 2019 was Coty (COTY), which is Revlon’s closet comparable. Fundamentally, Revlon’s mass market brands (Revlon, Almay) seem to be in better shape than Coty’s (Covergirl, Rimmel). For example, Covergirl’s square footage at Ulta (the largest U.S. beauty retailer) diminished and Rimmel is now completely out of Ulta stores, while Revlon and Almay both increased shelf space. Revlon’s prestige business, Elizabeth Arden, continues to do well, particularly overseas and in the airport duty free shops.”

Last month, we published an article revealing Mittleman Brothers bullish investment thesis on Revlon Inc (NYSE:REV) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Revlon Inc (NYSE:REV).

In Q2 2020, the number of bullish hedge fund positions on Revlon Inc (NYSE:REV) stock decreased by about 6% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Revlon’s growth potential. Our calculations showed that Revlon Inc (NYSE:REV) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.