What potential financial liability could Coty face if the fraud investigation leads to a settlement or judgment?

Potential liability:

If the fraud investigation culminates in a settlement or a court judgment, Cot Inc. would be required to record a contingent liability on its balance sheet. While the exact amount is unknown, comparable U.S. consumer‑goods fraud cases have ranged from low‑hundred‑million‑dollar payments to multi‑billion‑dollar judgments (e.g., LVMH’s $1.5 bn fine, Procter & Gamble’s $1 bn settlement). Given Coty’s 2023 net revenue of about $5 bn and its cash‑and‑cash‑equivalents of roughly $800 m, even a $250‑$500 m outlay would (i) compress earnings by 5‑10 %, (ii) force a material re‑pricing of its debt‑to‑equity ratio, and (iii) strain free‑cash‑flow generation that underpins its growth‑capital plan. The market therefore prices in a “legal‑risk premium” that could widen sharply if exposure materialises.

Trading implications:

Fundamentals – The liability would be reflected as a sizeable “non‑operating loss” in the next earnings release, likely widening the forward‑earnings discount to peers (e.g., Estée Lauder, Revlon). A breach of covenant ratios could also trigger higher borrowing costs, pressuring the stock’s EV/EBITDA multiple down toward the low‑10× range.

Technical – Coty has been trading near its $20‑$22 USD support zone for the past six weeks, with daily volume climbing on each legal‑news spike. A break below $20 would test the 50‑day SMA and could open a short‑position with a $22 USD stop‑loss as a defensive buffer. Conversely, buying pressure around $24‑$25, where the 20‑day EMA still holds, may signal a brief rebound if the company announces a “minimal” settlement (≤ $100 m).

Actionable strategy –

1. Protective short: Initiate a modest short position around $22 USD, placing a stop ~ $24 to limit upside risk if the case is resolved cheaply.

2. Long‑horizon hedge: Purchase out‑of‑the‑money put options (e.g., 30‑day $18 strike) to profit from any downside while preserving capital if the price stabilises.

3. Monitor: Keep a close eye on court filings, SEC disclosures, and any news of settlement amounts. A credible estimate from the Schall Law Firm (e.g., “settlement likely under $250 m”) can be used to recalibrate the stop‑loss or adjust position size.

In short, expect the market to price Coty’s potential liability aggressively; the safer play is to stay light‑to‑neutral until clearer quantification emerges, using defined risk‑management levels to capture either a corrective pull‑back or a brief bounce if the exposure turns out to be modest.