It has been several months since I last covered Naked Brand stock. So long, that the lingerie maker is now known as Cenntro Electric Group (NASDAQ:CENN). It merged with Cenntro Automotive Group on Dec. 31, 2021. As a result, Naked Brand’s shareholders own 31.85% of CENN stock. Cenntro’s shareholders own 68.15%.

When I last wrote about the former Naked Brand last August, it was facing delisting from Nasdaq by Oct. 30 because it traded below $1. It was the second time in less than a year that it would have to execute a reverse split to get its share price above $1. 

Just days before the deadline, Nasdaq gave it a 180-day extension. It is possible negotiations between the two companies were enough to extend the deadline for the exchange. 

Two weeks later, on Nov. 9, Naked Brand announced it would merge with Cenntro. The transaction cost Naked brand $282 million in cash plus control of its business by issuing new shares to Cenntro shareholders. The market capitalization of the combined entities was approximately $2 billion, according to InvestorPlace’s Joel Baglole.

The merger was completed on Dec. 31. CENN stock was trading at half its value when the deal was first announced. Approximately eight weeks later, CENN is trading 74% lower, around $1.40.

With Cenntro’s market cap about one-fifth of what it was in November, it is tempting to buy the badly beaten-down stock. 

Here are two reasons to think twice.

CENN Stock Is a Falling Knife for a Reason

I’ll get to Cenntro’s business in my second point. But, for now, I want to focus on the former management and board and why shareholders shouldn’t trust their actions. 

I can remember several InvestorPlace contributors touting Naked Brand’s online business in 2021 and its ability to make a game-changing acquisition that would send its share price to the moon.

InvestorPlace’s Louis Navellier had this to say in August about Naked Brand’s online strategy:

“Naked Brand stands to benefit immensely from its shift to e-commerce. That’s because consumers are buying their intimate wear online more and more. The market is growing. For example, one December report projected that the online lingerie market will grow at a compound annual growth rate (CAGR) of nearly 18% between 2020 and 2024. That amounts to $64.48 billion in growth during that period.”

Management said as much earlier in 2021, suggesting it was “uniquely positioned” to be a disruptive force in intimate apparel e-commerce. 

Some investors were eating up this pie-in-the-sky declaration. I sure wasn’t. I was deeply concerned that the company had issued one news release in three months leading up to my August 2021 article despite the fact its shares were floundering.

The Frederick’s of Hollywood (FOH) brand has been around for almost 75 years. While it has staying power, I’d hardly call it iconic. Although FOH Online was divested as part of the merger with Cenntro, it gave no details about the sale. Naked Brand paid $18.2 million for the business in 2018. I suspect it got substantially less.

The fact that Naked Brand’s management made a big deal of appointing a merger and acquisitions specialist (M & M&A) Simon Tripp to its board in March 2021 tells me everything I need to know about its integrity.

It talked a big game, but it had no interest in pursuing an online brand. Instead, it just wanted to find a way out of the mess it had gotten itself in.

Cenntro has Sold a Few EVs

The company announced on Jan. 21 that it produced 1,623 commercial electric vehicles (CEVs) in 2021, with the lion’s share coming in December.

While this is proof Cenntro has a real business, the track record of most manufacturers of CEVs suggests that the company’s losses in the future will be much higher than if they were operating an online e-commerce website for underwear and intimate apparel. 

So, the $250 million in cash brought onto its balance sheet through the merger will likely be spent very quickly. Therefore, shareholders can expect significant dilution and the addition of debt in the future. 

The financial situation at Cenntro will worsen before it gets better. Whether you want to call the merger of the two companies a de facto special purpose acquisition company (SPAC) combination, the Naked Brand shareholders have merely jumped from one burning boat to another. 

I will have to see the quarterly financials before I’m willing to render any opinion on this Hail Mary Pass by Naked Brand’s management and board.

With so many options out there, I’m puzzled why anyone would gamble their hard-earned capital on CENN stock. I really am. 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.