To put it simply, Naked Brand (NASDAQ:NAKD) stock isn’t going up due to improved fundamentals. Yes, there’s been recent news of the struggling apparel company shifting its focus to e-commerce (more below). But the main factor has been the mad rush of retail investors into NAKD stock.
It’s not getting “short squeezed,” as we’ve seen in recent days with overly shorted stocks targeted by retail investors. But these same speculators are dabbling in Naked Brand stock as well, in the hopes of scoring some fast profits.
That’s why shares soared 294% on Jan. 27 alone and opened at $1.88 per share this morning. But, this speculative frenzy is far from sustainable. Instead, expect shares to crater back below $1 per share, when (not if) the mania fades.
Yes, irrational exuberance can carry longer than skeptics expect. But, eventually things will reverse. So then, what’s the best move? Avoid this penny stock at all costs.
Why the Rally in NAKD Stock Will Soon Fade
Admittedly, it’s not as if shares are going parabolic on zero news. The company (a retailer of intimate apparel and swimwear), is looking to get out of its poor-performing brick-and-mortar business and put all its chips on e-Commerce.
On paper, this looks like a smart move. As a small operator (trailing-12-month sales of $54.7 million), this struggling apparel retailer has a better shot at profitability operating solely online. However, chances are they didn’t just make this announcement to keep their investors informed. Facing the risk of losing its major market listing if shares remained under $1 per share, the company had a big incentive to spur interest back into the stock.
Fortunately for them, this announcement came just ahead of the aforementioned mania in low-priced and heavily shorted stocks. Striking while the iron is hot, the company is further seizing the opportunity. How? By raising $50 million via a direct offering.
With investors betting the ranch on stocks, showing little concern for fundamentals, I don’t blame Naked Brand for cashing in on the madness. But, this dilution equity offering should be a red flag for those looking to buy at today’s prices, hoping it generates triple-digit returns for them as it has for those who got in early.
Sure, the music may not stop just yet. Shares could gain further before it’s all said and done. But don’t expect the enthusiasm to last for long. Once the dust settles, chances are shares fall back to prices well under $1 per share.
On Closer Inspection, Naked Brand Is a Weak Company
For the most part, retail speculators are buying solely on the hopes that shares continue to skyrocket due to ill-informed speculation. But others may erroneously believe, since it trades for a just a few dollars per share, that it’s a “cheap stock.”
NAKD stock may be low-priced. But it is far from undervalued. What do I mean? Operating in the red for years, the company posted losses of $29.2 million in the past year alone. In other words, $3.77 per share, or more than what the stock trades for today. Yes, these losses will come down, once the company divests its brick-and-mortar business.
But even excluding its soon-to-be discontinued business, the company’s current valuation more than reflects what its e-commerce business is currently worth. It gets worse once you factor in the upcoming dilution.
Once the stock sale closes, the company’s outstanding share count will rise from around 41.6 million to around 71 million. At $1.88 per share, that’s a valuation of around $133.5 million. Relative to the company’s e-commerce sales ($20 million), that’s a rich multiple, given the uncertainty this unit will see blockbuster growth in the coming years.
For now, this frothy valuation isn’t going to scare off many retail investors. As long as the momentum continues. But, once those who got in early cash out, the stock’s trajectory will quickly change course. And those who bought in too late? They’ll be left holding the bag.
Bottom Line: Stay Away from the Madness
I know it’s tempting to want to dive into high-risk “penny stocks” like Naked Brand. With investors making quick profits riding the current retail-investor-driven speculative wave, I know it’s hard to overcome the FOMO.
But use your head. Far from being a rising star in the e-commerce game, this is a low-quality company, currently selling for premium prices. Shares are only surging now because investors are buying on headlines and forum posts alone. Once the cavalcade of retail investors head for the exits, shares have tremendous room to fall.
Bottom line: Stay away from the madness, and avoid NAKD stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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