Earlier this year, I told InvestorPlace readers to avoid getting involved with Naked Brand Group (NASDAQ:NAKD). For the most part, I’m glad I did. At the start of the year, NAKD stock was trading hands at $1.67. In March, shares closed below 40 cents, representing a huge evaporation in market value.
Back then, I offered two glaring risks, both of which had to do with millennials and their opinions on fashion. First, according to author and men’s stylist Russell Smith, women really don’t place much emphasis on male undergarments. From his perspective, going overboard could “make your prospective partner question your taste and possibly (even, yes, in this enlightened age) your manliness.”
This poses a dark cloud on NAKD stock. As I stated, “If there’s no upshot for young men buying branded underwear, that eliminates half of Naked Brand’s consumer base.”
Second, young consumers have shifted away from branded apparel that was popular in the pre-Great Recession era. Back then, I wrote, “From Gap (NYSE:GPS) to American Eagle Outfitters (NYSE:AEO), all have struggled to adapt to modern consumer trends. In today’s fashion world, utility trumps brands. Obviously, that bodes poorly for NAKD stock.”
With modern consumers not attracted to what Naked Brand has to offer, NAKD appears a very risky bet. So, why the heck did shares skyrocket to finish the June 9 session at $1.63?
If I may be blunt, I have no idea. From my research, it’s possible that speculators anticipate that NAKD stock will hit the price point it needs to avoid a delisting. Beyond that, day traders could be gambling on the notion that things are bound to get better.
For NAKD Stock, You Must Choose Your Own Math
Back when schoolchildren read real books, not e-books, the Choose Your Own Adventure series was very popular. Unlike traditional “linear” storylines, the reader can make decisions for the protagonist at key moments in the plot. Because of their multiple possibilities, these books were essentially several stories in one.
However, I found these books to be incredibly arbitrary before I knew what that word meant. For instance, I distinctly remember one of my characters accidentally dropped a TV into the water while he was taking a bath. Zap. The end.
What does this have to do with NAKD stock? Mainly, when shares are trading at these rock-bottom valuations, anything can move them. From a reason to no reason at all, you could either look like a genius or a complete fool.
If you’re willing to accept that risk, I’ll grant you this: NAKD stock isn’t totally nuts. But you have to “choose” your math and have the conviction to follow through.
Here are your constants. In 2018, Naked Brand generated revenue of $75.93 million. Last year, it rang up only $59.45 million. This represented 0.19% and 0.14%, respectively, of the global market value of lingerie and men’s underwear at the time. Additionally, market capitalization was $23.9 million in 2018 and $1.25 million in 2019, representing 31.4% and 2.1%, respectively of NAKD revenues in those years.
Moreover, please note that to 2025, the global undergarment market will grow at a combined compound annual growth rate for both genders at just under 7%.
To justify buying NAKD stock at its current market cap of $12.13 million, you must assume that others will see value in it at a higher premium. Currently, Naked’s market cap is 19% of assumed 2020 sales of $64 million, which is 0.14% of forecasted 2020 global undergarment sales.
Perhaps Naked could generate more sales, which makes NAKD undervalued. Or it could disappoint, putting the proverbial television set into the water, while you’re taking a bath.
Outside Fundamentals Still Don’t Look Great
While I won’t stop you from trading NAKD stock if that’s your wish, you won’t find me recommending it as a long-term investment. That’s because the underlying company was questionable before the novel coronavirus pandemic. With it, Naked becomes even more of a volatile proposition.
Right now, most Americans simply want their normal lives back. And for many, this involves restoring their finances, which the Covid-19 pandemic brutalized. Also, at a time when people are saving money – and that includes affluent customers – the branded undergarments market lacks credibility.
Ultimately, Naked is a “casino” stock. If you’re looking for a quick profit, this is certainly the vehicle. Just don’t be surprised if things turn out exactly the opposite of what you intended.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.