Revlon Inc (REV), Avon Products, Inc. (AVP): How Could This “Misleading” Company Be a Good Investment for Hedge Funds?

While the growth potential of the cosmetic & beauty industry is all fine, intense competition among industry participants is a major threat. The competition is so fierce in this industry that on average these beauty firms spend only 2-3% of their budget on Research and Development but end up spending 20-25% on advertising and promotional activities, says Jacques-Franck Dossin, an analyst at Goldman Sachs. The huge marketing budgets have put pressure on the bottom line of Revlon as well. The situation became so critical in early 2000 that Revlon was on the verge of declaring bankruptcy.

Revlon’s sales had been stagnating and it had a huge debt problem. In 2011, Revlon had a debt-to-capital ratio of 229%, compared to an industry mean of 20-40%, and any investor would have considered it as a bigger threat than competitors.

Conclusion

The recent jump in Revlon Inc (NYSE:REV)’s stock attracted market makers and large hedge funds. According to Insider Monkey’s database, big name funds like Gotham Asset Management, Millennium Management, D E Shaw and Citadel Investment Group were all in this year. Overall, since giant hedge funds have started to show interest in Revlon, there is likely value in Revlon that investors need to be acknowledge.

The article How Could This “Misleading” Company Be a Good Investment for Hedge Funds? originally appeared on Fool.com and is written by Mike Thiessen.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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