The Recent Rally in Naked Brand Stock Was Never Built to Last

I get it, I get it, I get it: Companies otherwise pronounced dead on arrival can move some investors to kick away the cemetery dust with glee. Such is the case with Naked Brand (NASDAQ:NAKD). NAKD stock was trading at just 19 cents per share as of New Year’s Day. It hit a mind-boggling peak of $1.65 by the end of the month. 

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

Source: Shutterstock

For those who delight in calculating such run-ups — usually the investors who got there first — that’s a stratospheric bounce in excess of 768% 

So what turned a penny-stock nightmare into a day trader’s dream? For anyone who followed the blast-off of GameStop (NYSE:GME) during the exact same time range, you have to wonder: Was a certain group of Reddit users responsible? And/or that financial analyst guy who goes by Roaring Kitty? He actually appeared before Congress and declared, am not a cat.”

This much I’ll meow: When a share of your stock trades for less than a pack of Tic Tacs, there’s probably nowhere to go but up, but as any penny stock veteran knows, that doesn’t mean it will go up. More than likely, it will tank.

Still, NAKD stock has soared by more than five times to date in 2021. Let’s get to the bare bottom of things and discover the naked truth, if you will. 

NAKD Stock and the Reddit Rally

First, the basics for all you Naked newbies. (Nudies?) The clothing company, based in New York and with overseas roots in New Zealand, specializes in intimate apparel and swimwear. It wallowed in the investment dregs for all of 2020, moving to me to suggest at one point that it might want to put some marketing muscle behind its iconic and campy Fredericks of Hollywood imprint. 

Turns out, NAKD stock didn’t need my input to stage a major comeback. So what buffed Naked’s reputation? (Certainly not this inexcusable run of Dad jokes.) Turns out that Redditors and the members of r/Wallstreetbets anointed Naked as one of their underdog stocks to back.

Much has been written about why this group of investment rebels do these things. No doubt, the quest for vacation homes and champagne baths plays a role. Sometimes it’s about sticking it to the short-sellers who bet against these stocks with the explicit hope that they crash and burn — a major motivation behind the GameStop run-up.  

The Mystery of a Dominant Company’s Downfall

Yet there’s something else at play here, as my InvestorPlace compatriot Alex Sirois recently highlighted. There’s a solid argument for the theory that NAKD stock was unjustly punished by flighty investors for turning in some meh earnings reports. As a result, it fell/imploded faster than a bald eagle pummeled by a cruise missile.

As recently as early 2017, shares traded for more than $1400 per share. Still trading in $600s and $700s through 2018, the share price had declined to less than $10 by the summer of 2019. NAKD stock changed hands for less than $1 a year later. Huh? Imagine that you were in buy-and-hold mode with this investment.

In the first six months of 2018, Naked Brands posted revenue of $41.43 million. Then in May 2020, it reported full-year revenue of $65.77 million.

“Prorated, that would be roughly [$32.69 million] for a six-month period,” Sirios writes. “However, in the wake of that report, NAKD stock fell below $1.”

Call it unfair all you like. Hey, I do. But since when was Wall Street fair, rational or not about hopping off one bandwagon in search of another? 

An Apparel Unravel

Look, there is precedent for a once-hot stock surfacing from an abyss deeper than the Marianas Trench. I think about Citigroup Inc. (NYSE:C).

When the Great Recession made it roar like a steroid-injected bear, it traded for 95 cents per share on March 5, 2009. As a cheeky Reuters writer put it, a roll of toilet paper fetched the same price. Today, Citigroup trades for close to $70 per share.

But the major difference between then and now was that the world’s financial markets had every motivation to nurse Citigroup back to health. As for this maker of intimate apparel, I’m not sure who has their back. That leaves one of three possibilities.

Naked Brand could somehow, someway work its way out of its baffling funk. Reddit rebels could ride to the rescue. Or, a band of marauding space goons from Planet Au Naturel could enlist their birthday suit blasters to zombify those who would not otherwise buy either Naked’s lingerie or NAKD stock.

As much as I’m not betting on number three (tough as it is), I’m not going to stake my investment dollars on number one or two either. Sure, throw $1,000 in disposable income at NAKD stock. It’s the equivalent of 241 grande mochas. If those 600 or so shares hit $20, you’ll soon have a hefty $12,000 to buy all the funky bras you want.

Either that, or you’ll be strapped.

Not me, anyway. Naked? Nay.

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


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/nakd-stock-rally-not-built-to-last/.

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