Stop Dumping Money Into Vastly Overpriced Naked Brands Stock

Naked Brands (NASDAQ:NAKD) stock has roared back to life. NAKD stock was trading for less than 10 cents per share last fall.

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

Source: Shutterstock

Over the past few months, however, the stock gradually moved up to the 50 cent range. Then, two weeks ago, Naked Brands’ stock launched from 50 cents up to as high as $3 at one point.

Naked soared at the same time that most of the other WallStreetBets stocks such as GameStop (NYSE:GME) and AMC (NYSE:AMC) were at peak excitement. Not surprisingly, as those stocks have crashed, Naked has fallen back as well, with shares currently going for around a dollar.

Still, the stock is up more than 1,000% off the 52-week-lows, so that’s impressive.

Naked Shorting

At first glance, it might seem weird that traders have latched onto NAKD stock as part of the WallStreetBets movement. Naked Brands is not a particularly well-known or iconic company. Thus, it’s rather out of step with things such as GameStop, AMC, and BlackBerry (NYSE:BB) which hold more popular appeal.

Rather, it seems, the company’s name is what generated interest. WallStreetBets has focused on the phenomenon of naked shorting. A naked short is where a trader short sells a stock without obtaining a borrow of said stock before making the sale.

The government made naked short selling illegal following the 2008 Financial Crisis. However, in some cases, naked shorting may still occur.

More commonly, shares may be lent more than once because it takes three days for trades to clear. In that interim period when shares haven’t settled yet, the new holder may lend them as well.

Additionally, market makers have an exemption to the naked shorting rule so that they can hedge their positions. So, much of the talk around illicit naked shorting is probably overstated.

Still, it’s 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. As a result, Naked Brands was part of the group of stocks in which Robinhood limited trading.

Here’s the funny thing though: There isn’t actually that much short interest in NAKD stock right now.

As per Finviz, only around 7% of Naked’s float has been shorted as of the most recent data. That’s higher than the average company, sure. But it’s nowhere close to, say, GameStop, where 122% of the float is short. So, even if the theory around buying high short interest stocks is correct, that wouldn’t necessarily help Naked’s stock price too much.

Massive Dilution

While traders are focused on naked shorting, people are missing out on the huge dilution at Naked Brands. Even if there were a large short interest, it’d still be hard to squeeze NAKD stock. That’s because Naked Brands is issuing tons of new stock to keep funding its business.

This means that short sellers can simply cover their positions by grabbing the newly-printed shares of NAKD stock from the company’s various capital raising operations. Thus, you’re not going to have a sustainable short squeeze, as the supply of shares continues to climb.

That’s in distinct contrast to something like GameStop, where the company wasn’t issuing vast quantities of new shares to the public.

Also, as a result of the massive issuance of shares, Naked Brands is far more expensive than it might seem at first glance. Last summer, when the stock was trading at $1, the market capitalization was in the low tens of millions.

Now the company is worth nearly half a billion dollars, even at the same share price. As of the company’s latest capital raise, it’s now up to 476 million shares of stock outstanding.

Thus, when you see people saying the stock should trade up to $2 or $3, consider that this would be a $1 or $1.5 billion market cap for Naked. Meanwhile, Naked has been generating less than $100 million per year in revenues and has seen its business decline significantly.

There’s no reason why an unprofitable textile business should trade at a sky-high price/sales multiple like that.

NAKD Stock Verdict

Thanks to the recent Reddit trading enthusiasm, Naked Brands has soared in recent weeks. However, nothing has happened with the underlying business to justify the excitement. As I documented recently, the company is losing lots of money and has not demonstrated that its business model will ever reach profitability.

The company is now trying to pivot to a more digital-focused strategy. That’s understandable given how poorly the traditional business was running, even before the pandemic hit. But it will take a long time to see fruits from that, if ever.

Given that the company has been able to raise capital, its shares should retain some value going forward. But the company’s current stock price is far in excess of the actual value there.

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

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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