Why Revlon Stock Looked Ugly on Wednesday

What happened

One of the major meme stocks of the summer, Revlon (NYSE:REV), had one of its many eventful days on Wednesday. Following a legal ruling that temporarily halted trading in the shares, the cosmetics company's volatile stock closed the day down by nearly 12%.

So what

That morning, U.S. Bankruptcy Judge David Jones ruled against a request from minority Revlon shareholders for the company to form a special committee to represent their interests.

A group of such investors had filed the request in order to protect the value of Revlon stock. But Jones said they did not sufficiently demonstrate that there was "a substantial likelihood of a recovery." He added that a rising share price alone is not enough to justify the creation of such a committee.

The storied cosmetics company filed for Chapter 11 bankruptcy in June. Since then, many small-stake investors have piled into the shares, hoping for a bump when and if Revlon is bought out by a third party. Others could be hoping for a short squeeze, as the stock's short interest remains high at nearly 36% of its float.

Special shareholder committees are rare in Chapter 11 bankruptcies. This is because the company undergoing the process is required to pay its creditors in full before it can distribute any monies to equity holders.

Now what

Revlon continues to feel like a falling-knife situation, in which the share price could easily dive to $0. Those willing to consider investing in the stock now are essentially gambling -- and at very unfavorable odds. I would stay far away from Revlon.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.