Don’t Lose Your Shirt With Speculative Naked Brand

Should you gamble on Naked Brand Group (NASDAQ:NAKD) stock? Notice I said, “gamble,” not “invest.” Sometimes there’s ample opportunity in small stocks. But this isn’t one of those situations. With the intimate apparel maker hemorrhaging cash, and the facing the risk of delisting, there’s very little to build a bull case upon.

NAKD stock
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Yet, these factors alone do not mean shares are fast headed toward zero. Granted, the stock has lost about 95% of its value in the past year. But, with NAKD at penny stock levels, speculators could still dive back into shares, sending them to prices well above today’s levels.

With this in mind, it isn’t worth taking a short position at today’s prices.

However, that’s far from being an invitation to buy. Buying this floundering company, on the hopes the Robinhood crowd will bid it higher, isn’t a rational way to invest. Buying on momentum and/or fear of missing out may be working with a lot of names right now. But, it’s the kind of thing that works until it doesn’t. You don’t know when the music is going to stop.

In short, you could lose your shirt going long Naked Brands. You could also lose your shirt going short. So, what’s the play? Simply stay away.

There’s No ‘There’ There With NAKD Stock

First things first, what is Naked Brand? As the name hints at, this company markets underwear and lingerie. It sells these products across nine brands, but the one you may be most familiar with is Frederick’s of Hollywood.

But, this “also-ran” portfolio of brands isn’t enough to keep the company profitable. For fiscal 2020 (ending January 2020), the company lost $33.9 million, or $22.58 per share. Keep in mind that NAKD stock right now trades for just 59 cents a share! With a market cap of $4.6 million, losses were 7 times the company’s current market value!

If that alone doesn’t scare you off, I don’t know what will. And before you say “it’s a turnaround opportunity,” consider how far sales have fallen since 2017.

A few years back, the company was generating more than $100 million in sales. In the prior fiscal year? Just $58.2 million. And that was before the novel coronavirus started to hurt retail sales. Sales declines likely have accelerated in the past few months.

As our Josh Enomoto wrote back in June, you have to “choose your own math” to justify buying NAKD stock right now. With a pitiful share of the undergarment market, this company has very little moat. And with Covid-19 leading households to tighten their belts, it’s doubtful sales have stayed resilient.

So, why would anyone buy this stock right now? Naked speculation, pure and simple. But, retail traders buying on momentum, FOMO, or any other non-fundamental analysis is a key reason why it’s not safe to go short this name right now. Even as shares trade for near pennies.

Yet, It’s Too Risky to Bet Against Them

It’s too late to short NAKD stock. A year ago, going short would’ve been a winning trade. But, after falling from around $16 per share to mere pennies, there isn’t much left to bet against.

Also, in today’s market, speculators are trading stocks as if they’re numbers on a screen instead of treating them like shares in a business. In other words, shares could move substantially higher, even without any positive news out of the company.

However, this isn’t a real reason to take a chance with NAKD stock, either. You might get lucky and buy ahead of the crowd. But, statistically, you’re more likely to lose your shirt. Recent developments point toward the latter.

Back in May, the company received a listing qualifications notice from NASDAQ. They had until June 29 to submit a plan to keep its listing. Unless it pulls off a reverse split (which wouldn’t be the first time), the company is going to get delisted.

The result? Shares will fall to the over-the-counter market. And, since Robinhood doesn’t offer OTC stocks, much of the retail money that could help push shares higher evaporates overnight. In other words, the music will stop for NAKD stock.

Just Say ‘No’ to NAKD Stock

As I said above, there’s simply no “there” there with Naked Brands. There’s no economic moat to speak of, and the underlying business is fast declining. With continued losses, it’s no surprise the stock has lost most of its value in the past year.

And, even with the chance speculators irrationally bid up shares again, it isn’t worth chasing this stock. With a potential delisting around the corner, the odds are shares will fall further.

Yet, it’s still too late to go short. So, what’s the call? Don’t buy, don’t short. Just say “no” to NAKD stock.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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