Sycophantic Investors Keep Admiring Naked Stock’s New Clothes

Stocks to sell

Bull markets often make investors act out of character. This phenomenon is currently playing out with the Reddit “meme stocks,” in particular Naked Brands (NASDAQ:NAKD). At one point this year, NAKD stock “soared” to a price of $1.65 per share.

White undergarments hang on wooden hangers against a white background.

Source: Shutterstock

However, investors familiar with Naked Brands might recall this company spent most of 2020 trading below $1 and appeared to be a deeply troubled penny stock.

But that hasn’t stopped speculative investors who saw an opportunity to put the short squeeze on NAKD stock. Even though the stock has given up much of those gains, it is still trading around 70 cents per share as of this writing.

I’d love to give you some in-depth analysis of NAKD stock. But I can’t. Because I don’t see much that’s really changed about the story of Naked Brands. To my mind, it’s the same argument we were having last year.

Nevertheless, investors continue to tell me that the emperor is clothed, despite what the financials say. You can admire NAKD stock if you like, but it doesn’t change the fact that this is an obvious penny stock to sell.

Blazing Forward With E-Ecommerce

Committed investors seem to believe that Naked Brands will make a successful pivot to an e-commerce only model. Part of the logic for this is that the company has used a share offering to pay off debt.

The future of retail will rely on having an e-commerce presence. Ok, Naked Brands can check that box. It’s cleaned up its balance sheet. That’s another box to check.

So what’s not to like? I’ll offer a couple of thoughts.

First, I might give NAKD stock the benefit of the doubt if it were an up-and-coming company. But Naked Brands has been around for a long time. And the fate of its business primarily rests on its ability to breath new life into its Frederick’s of Hollywood brand. I’m not sure if the company will successfully make that change with a brand that initially rose to prominence in the 1980s.

Secondly, sure it’s possible, even likely, that lingerie will make a comeback as we all start seeing more of each other so to speak. But this is a category that has a lot of competition. And most of that competition is already online. And then there’s a company like L Brands (NYSE:LB), which is one of the brick-and-mortar retailers that are having success in e-commerce.

If you don’t want to take my word for it, I’ll simply suggest you read what my colleague Will Ashworth says about this issue. And particularly the role that Amazon (NASDAQ:AMZNplays in the category.

What About That Stock Price? 

The second point I need to make about NAKD stock is that it is currently trading below $1. And that puts it at a high risk of getting de-listed. However in 2019, the company conducted a reverse stock split that temporarily got it in the good graces of the NASDAQ exchange.

Once again, I’ll turn to Ashworth, who writes why even if the company goes for a significantly less onerous split than the one-for-100 split it made in 2019, it will have a heavily dilutive effect for current shareholders.

NAKD Stock Is a Farce Until It Shows Otherwise

Naked Brands remains a company that faces a steep climb to relevancy. However that’s not the narrative that many speculative investors want to believe about NAKD stock. They see a stock that’s up over 200% for the year and seeing a gigantic opportunity.

I don’t agree with it, but I can understand it. Naked Brands appears ready to use its $270 million in cash to make a strategic acquisition. But even that kind of move seems to suffer from ill timing. Because any deal the company makes will bring with it debt. And that debt will be hitting the books right at at time when inflation is threatening higher interest rates.

I understand what investors may want NAKD stock to be, but admiring its fine clothing just doesn’t change the fact that it’s naked.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019. 

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