• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

Melvin Capital's Demise Presents a Beauty of an Opportunity

The top holder in several companies, the hedge fund's abrupt liquidation has contributed to weakness.
By BRAD GINESIN
May 22, 2022 | 01:20 PM EDT
Stocks quotes in this article: GME, COTY, PG

In the current bear market, selling for non-fundamental reasons can often provide an opportunity to buy a bargain.

This past week, Melvin Capital, an embattled $7 billion hedge fund, announced it's closing down after steep losses over the past year and a half. Recall, Melvin was the prime target of a short-squeeze in GameStop (GME) and a handful of other stocks they were known to be short.

Melvin Capital ran a concentrated portfolio and was the top holder in several companies. These positions have been liquidated in the past month in anticipation of closing the fund. The selling in their list of stocks into an already weak market has exacerbated the downdraft in those names.

Sifting through Melvin's portfolio for a buying opportunity uncovers Coty (COTY) , the multinational beauty company. The soon-to-be-defunct hedge fund owned 48.7 million shares earlier in the year, almost a 6% stake. Coty's shares are down 40% year to date to $6.25; Melvin's abrupt liquidation undoubtedly contributed to the weakness.

In early May, Coty reported decent earnings, raising EPS guidance but guiding EBITDA to the low end. As many other multinational companies, Coty's results were impacted by the lockdowns in China and exiting its business in Russia. The company, however, showed progress deleveraging its balance sheet after levering up to acquire Procter & Gamble's (PG) specialty beauty business in 2016.

RBC analyst Nik Modi is bullish with a $14 target based on Coty's fundamentals improving and strong management execution. Modi found positives in Coty's Prestige business: "Prestige segment posted an impressive beat on both the top and bottom lines. LFL growth of +25% was over 10pts ahead of our/consensus estimates of ~14%. EBIT margins of ~17% came in more than ~600bps ahead of our/consensus estimates closer to 11%, driving both the top-line and profit beats. Plus, all geographies post double-digit growth."

The Coty story does have some hair, and Modi points out some challenges: "1) Consumer segment results missed expectations. LFL growth of +10% was short of our estimate of +13% and even further below the aggressive consensus estimate of +16%. Profit for the segment was negative at -2.1% vs. our/consensus estimates of closer to 3%. Management cited being short on capacity in its Covergirl brand, as demand has been stronger than plan, and continued investment in various initiatives (Rimmel, Bourjois, and Max Factor brand repositionings). 2) Russia exit will impact FH1'23. Management lowered its CY'22 outlook of ~$1bn to ~$950mm as it exits Russia, which tends to weigh more heavily toward Prestige and FH1. The exit will result in about ~$50mm of lost EBITDA from FH1'23."

Morgan Stanley lowered their price target after earnings but likes the setup; "Guidance does look fairly conservative to us, albeit with a lot of moving pieces. We remain Equal-Weight here, but are intrigued by relatively low valuation vs a clearly improved internal execution story, offset by macro risk factors. Post Q3, we are lowering our PT to $9 from $12 based on an 11x times FY23 EV/EBITDA multiple."

JAB Holding, the German conglomerate, owns 55% of Coty. Recent post-earnings insider buying by a director of 50K shares gives some confidence of a good investment opportunity.

Overall, Coty is improving fundamentally with familiar macro headwinds in the current environment. Nonetheless, the shares are down 40% this year to a multi-year low not seen since the pandemic. Economic uncertainties are a factor in Coty's decline. Still, market-related stock liquidations have depressed the shares to an attractive entry point, setting up the stock for a meaningful rebound over time.

\

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Ginesin had no positions in any securities mentioned.

TAGS: Hedge Funds | Fundamental Analysis | Investing | Markets | Stocks | Trading | Value Investing | U.S. Equity

More from Stocks

The Mask Gets Yanked Off of Goldilocks Narrative

James "Rev Shark" DePorre
Sep 21, 2023 4:29 PM EDT

The bulls' story always sounded like a stretch, and now they will have to develop a new narrative to help drive a recovery.

Doug Kass: Risk Happens Fast. This Is All About to Get Real

Doug Kass
Sep 21, 2023 2:30 PM EDT

Caution and stock market congestion may lie ahead as interest rates stay higher for longer, while the stock market decline has now assumed a global character. Plus, more lessons from Howard Marks.

After Splunk Grab, Cisco's a Slam Dunk

Stephen Guilfoyle
Sep 21, 2023 11:54 AM EDT

I didn't like the idea of a cash deal at the start, but after going through the fundamentals, I think it's a wise move -- and here's why I'm adding the stock.

The Day After the Fed Meeting, I'm Gambling on This Stock

James "Rev Shark" DePorre
Sep 21, 2023 11:27 AM EDT

Here's why I like this gaming-related play, and why stocks could eventually offer some good entry points -- but not yet.

Whoa, We're (Only) Half Way There: Why the Correction May Have a Long Way to Go

Guy Ortmann
Sep 21, 2023 10:12 AM EDT

Four key indexes shifted their trends from neutral to bearish Wednesday.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 10:24 AM EDT BRUCE KAMICH

    This Could Get Messy

    A number of key stocks are getting close to import...
  • 01:41 PM EDT CHRIS VERSACE

    Latest AAP Podcast With Helene Meisler!

    Listen in as the Action Alerts PLUS podcast talks ...
  • 09:07 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The Most Common and Costly Mistake in Investing
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login