Is the stock market a casino? As a financial analyst, I believe that the stock market is not what a casino represents. The common factor is risk. But in a casino, you simply make bets, have no expectations but simply want to have fun, and the odds of losing your money are close to 100%. The keyword to highlight is betting or gambling. Naked Brand Group (NASDAQ:NAKD) stock has a lot of features that now make it a bet, participation in a speculative frenzy. This is why I recommend avoiding NAKD stock.
Gambling with stocks is not sophisticated stock trading and not prudent stock investing. Here, I will mention some of the key reasons why NAKD stock is one to avoid. For traders that want to buy the stock, you should beware of all the possible risks. For Naked Brand, they are too many, too severe.
Reasons to Avoid NAKD Stock: 1) Meme Stocks Are Too Risky
Another recent article on NAKD stock explained how “Reddit Users Grant NAKD Stock A Wish And A Chance To Hit $10.” Wishing for a stock price to rise is too naïve.
To me, Reddit and any other forum or social media platform that simply mentions stocks and decides to buy or sell them without any material catalyst such as fundamentals, is pure stock manipulation. And this is illegal. I would like to see the Securities and Exchange Commission (SEC) intervene and regulators on social media set strict rules to combat stock manipulation.
Stock trading is not about waking one morning and throwing a dart randomly to see where it lands. Picking stocks that way would be insane, illogical and too risky. It’s pure betting.
NAKD stock has been featured by a sub-Reddit group — r/WallStreetBets. Note that the name has the word “bets” in it. Beware of pump-and-dump schemes. They are illegal. Recent history with Gamestop (NYSE:GME) showed that its stock price was a bubble, as it burst from $483 per share to a price around $51.20 lately. I strongly believe that this could the case for NAKD stock.
2) Competing With Hedge Funds Won’t End Well
For individual investors, competing with hedge funds is too risky. Want some evidence? “A class action lawsuit filed in California Southern District Court on January 28, 2021, has been amended to include six hedge fund companies worth billions of dollars, a total of ten online brokers who manipulated the stock market, and the thirteen stocks involved.”
NAKD stock is one of the 13 stocks being manipulated. While its stock price could move higher, the time when these hedge fund companies will decide to book profits is unknown. For investors and traders with portfolios that cannot be compared to the size of the hedge funds portfolios, trying to gain some quick profits with NAKD stock has an extra risk. At any time, supply will overcome demand. And this means that you could buy the stock at or near its peak price, short term or long term.
3) Poor Fundamentals
For all the past five consecutive years the company has net losses. Losses of $19.06 million in 2016 grew to losses of $35.17 million in 2020. Revenue declined 23% in 2020 to $59 million compared to $76.94 million in 2019.
One of my favorite key financial metrics — free cash flow — is also negative for all the past five consecutive years. A negative free cash flow of $9.82 million in 2019 grew to a negative free cash flow of $15.08 million in 2020.
The balance sheet of the company is too weak. In 2020 the company reported $2.45 million as cash and short-term investments. The short-term debt for 2020 was $12.43 million, and the long-term debt was $24.21 million.
This shows that the company may face soon severe problems to pay off its debt.
4) The Risk of Delisting
In January 2021, I mentioned NAKD stock in my article about stocks that would likely be delisted soon.
I wrote, “Poor fundamentals are the main cause for the stock price declining and the risk of being delisted soon.” The stock price then was about 45 cents per share, which was below the $1 threshold to be listed on the Nasdaq composite. Nasdaq has given an extension to the company until May 24 to give NAKD a chance to pull the stock price higher.
Now was I wrong? Since then the stock has rallied to a current price of $1.34. But the stock has not yet closed above the $1 minimum stock price for at least 10 consecutive days. So the risk of being delisted is still possible.
5) Stock Dilution Is Another Negative Factor
What is worse for valuation rather than just having negative free cash flows? A stock dilution. Naked Brand Group “announced the closing of its previously announced registered direct offering (the “Offering”) of 29,415,000 of its ordinary shares at a price of $1.70 per share, which is at-the-market under Nasdaq rules.”
This stock dilution lowers the intrinsic value of NAKD stock. Which is already too expensive.
The Bottom Line
A meme stock with very poor fundamentals, stock dilution and the possibility of being delisted. These risks are too severe, making NAKD stock one to avoid.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.