Revlon's Fundamentals Pretty, Not Perfect

 | Jun 25, 2013 | 9:30 AM EDT
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Is an investment in Revlon Inc. (REV) the place to be in 2013? According to an article published in Barron's this weekend, it is. On Monday The Motley Fool followed in Barron's footsteps, providing its own endorsement for this cosmetic and beauty care company.

Trading at only 11 times its estimated 2013 earnings, vs. approximately twice that for its competitors L'Oréal (LRLCY) and Estée Lauder (EL), and Coty (COTY), Revlon seems like a bargain! As you may have noticed last Tuesday on Mad Money with Jim Cramer, I'm definitely in the market for a bargain these days. As the larger market corrects, it's common for names such as Revlon to finally see their share of the spotlight. But is Revlon worth taking a closer look at?

On the fundamental side Revlon is pretty, but not perfect. It's shown consistent revenue growth over the past four years. But its net income has fluctuated widely and its weak balance sheet causes concern. Its chairman, Ronald Perelman, who owns 77% of the company, is also often viewed as a rather colorful character.

Revlon also has a rather limited global reach outside the U.S., other than the Asia Pacific region, but this isn't necessarily a bad thing. With interest rates once again on the rise in the U.S., consumers are taking another look at the state of the economy and their own bank accounts. As a result, the market often sees an uptick in sales of little "splurge" items such as nail polish and other cosmetics.

As Barron's reported, Chris Mittleman, the chief investment officer at Mittleman Brothers, believes Revlon is worth $30 a share, and as much as $40 on a takeover bid. It closed at $21.67 on Monday. From the technical viewpoint, I have to agree on both counts.

Revlon took a beating in 1998 and struggled for years under the burden of heavy debt. But under the current CEO Alan Ennis, the company has been able to refinance its debt and has seen a boost in both sales and profits. Volatility slowed after 2006 and Revlon found its market bottom in 2009.

After making rapid gains into the end of that year the company's shares fell into a narrowing channel until earlier this year when the triangle that had developed on the monthly time frame broke higher, triggering a technical buy to accompany increased fundamental interest in the company.

This year's rally in Revlon quickly took prices to a 61.8% extension level compared to the 2009 rally. Rounded highs created a struggle for the bulls, but the trading channel on the daily time frame over the past several months has shown bullish traits despite hugging lows. The intra-channel swings remained stronger than the corrections back to the lower end of the channel and the stock merely received the boost it needed thanks to recent news to finally free itself from that channel.

As we look at overhead resistance, the $30 and $40 price points Mittleman pointed out make perfect sense for technical target points. The $30 price is approximately the 100% measured move from the 2009 rally and is also resistance from the middle of the 2003-to-2006 price congestion when Revlon traded in a range for several years before breaking lower.

The $40 price point is also a key Fibonacci extension level at 161.8% compared to the 2009 rally. It also represents price support from the upper end of the 2003-2006 trading range and the lower end of the 2001-2002 trading range. Both are marked horizontally in blue on the monthly chart below.

From a portfolio standpoint, Revlon is a company I would expect to hold for upward of a year. It could still struggle within the confines of monthly congestion with prior highs putting a damper on the bulls, but the resistance may not be that strong and another monthly trigger may not take place.

Instead, I'll be building a position in Revlon as just one more position guaranteed to further diversify my portfolio and hope the beauty I am seeing in this position is not merely cosmetic.

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