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As Short Squeeze Unravels, Naked Brand’s Rally Won’t Hold

Among the most severely impacted companies in the wake of the novel coronavirus pandemic is intimate apparel and swimwear retailer Naked Brand Group (NASDAQ:NAKD). The onset of the novel coronavirus was particularly hard on the intimate apparel industry, and this presented persistent challenges for NAKD stock holders.

a man and woman wear plain white underclothes from Naked Brand (NAKD)
Source: Shutterstock

Of course, the NAKD stock bulls will point out that the share price has rebounded sharply in recent weeks. The charts don’t lie, I’ll admit. Yet, we can pose questions about why the share price rose so quickly.

And, we can consider whether the increase in the company’s stock price is driven by a strong improvement in the company’s fiscal outlook, or on short-term hype fuel.

When the price of a stock doesn’t seem to match the company’s fiscal prospects, it’s time to be cautious. I’ll need to convince you of this, though, so let’s begin with an analysis of the NAKD stock price.

A Closer Look at NAKD Stock

The problem with NAKD stock, from a technical perspective, is that it’s prone to quick pops and equally precipitous drops.

Back in March of last year, NAKD stock holders dumped their shares as the Covid-19 pandemic put severe negative pressure on Naked Brands’ business. As a result, the share price tumbled to 40 cents.

In June, however, NAKD stock suddenly popped to $1.63. That rally didn’t last too long, though, as the NAKD share price then commenced a slow, painful slide that bottomed out at around six or seven cents in November.

Fast-forward to January of this year, when NAKD stock was trading at around 39 or 40 cents. All of a sudden, the stock leaped to a 52-week high of $3.40 on Jan. 28.

Unfortunately, folks who chased after NAKD stock near its peak price were promptly punished. On Feb. 2., the stock fell back below $1.

The share price did recover somewhat, and it landed at $1.44 on Feb. 12. Nevertheless, it’s quite difficult to predict the next short-term move that NAKD stock will make.

Seems Like a Meme

It’s hard to precisely define what a meme stock is. The general gist of it is a stock that’s arbitrarily chosen by amateur traders as a pump-up target. You could say that a meme stock is a joke, but it has serious consequences for investors.

One characteristic of a meme stock is that its short-term price action isn’t based on the fundamental health of the company. NAKD stock certainly seems to fit this description.

Evidently, the folks at r/wallstreetbets on Reddit have a sense of humor. As InvestorPlace contributor Ian Bezek explains, these Redditors evidently took the company’s name as a reason to “go naked” on NAKD stock:

“[Naked shorting is] a very popular theme on WallStreetBets and other online trading communities. With everyone talking about naked shorting, it was simply a matter of suggestion to start hyping up Naked stock as another way to stick it to the short-sellers.”

No Reason to Get Involved

If Bezek’s theory holds true, then NAKD stock might have popped simply because the Reddit traders thought it would be funny joke to challenge the Naked Brand naked short sellers.

Perhaps they wanted to implement some social justice, as well. Who really knows what their motives might have been? In any case, I don’t view any of this as a reason to buy and hold NAKD stock.

Remember, you own a piece of a company when you buy a stock. When it comes to Naked Brand, the company isn’t doing particularly well.

With Naked Brand losing $34 million a year (based on full-year fiscal 2020 stats) on revenue south of $60 million, it’s fair to conclude that the company remains in financial distress.

The Bottom Line

Naked Brand’s negative profit margin is a bright red flag. Come to think of it, so is NAKD stock’s status as a meme stock.

Therefore, let’s quit focusing on joke stocks and take fundamentals seriously. The drops in NAKD stock are just as sharp as the pops. And, the next share-price move could easily be to the downside.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

Article printed from InvestorPlace Media,

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