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

Here’s an unanswerable question: why did Naked Brand Group (NASDAQ:NAKD) stock soar in January?

Alejandro © Provided by InvestorPlace a man and woman wear plain white underclothes from Naked Brand (NAKD)

Part of the answer, of course, is Reddit. Online traders took hold of NAKD stock the same way they did other names. But take it a step further: why did Reddit choose NAKD?

Nearly all of the Reddit-driven rallies went too far. But there were underlying bull cases that at least made some sense: a business transformation, or a post-pandemic “return to normalcy.”

There really wasn’t a bull case that made any sense for NAKD stock. Before January, Naked was on a straight path to bankruptcy. It was a tiny company unfamiliar to most U.S. investors.

Why did NAKD stock get so much attention? Again, it’s an impossible question to answer. There isn’t one specific reason.

But part of the reason has to be the company’s ticker symbol. At a time when a “joke” cryptocurrency can be worth tens of billions of dollars, it’s not far-fetched to believe that online traders bid up NAKD stock because it would be funny to do so.

It should go without saying that’s not a long-term bull case. And while NAKD stock has pulled back, it hasn’t pulled back far enough.

The Quick Case for NAKD Stock

Let’s try and be fair. What Naked Brand is here in May is not what Naked Brand was back in early January.

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Most notably, the company wisely has taken advantage of its trader-fueled rally. It’s aggressively sold stock to firm up its balance sheet. It now has nearly $200 million in cash on the balance sheet.

More recently, the company divested Bendon, its former brick-and-mortar subsidiary.

So, broadly speaking, you can see a bull case here. The company has a war chest of cash. It’s now an e-commerce pure-play. That seems like an attractive combination in this (or any) market.

The Stumbling Blocks

Look closer, however. The cash on the balance sheet is good news in the sense that Naked’s odds of bankruptcy are far lower. The company had a “going concern” warning in recent financial reports filed with the U.S. Securities and Exchange Commission, a warning which specifically tells investors there’s a risk a company might not survive for the next 12 months. That warning obviously will not be appearing on the 2021 filings.

But the cash isn’t good news in terms of upside for NAKD stock. It’s a gift to management – largely the same management that steered Naked Brand Group into trouble in the first place. That cash came from shareholders, but it’s not controlled by shareholders. Naked management most likely is going to make acquisitions with that money.

In this era of SPACs (special purpose acquisition companies), such a strategy seems attractive. Generally speaking, that’s not the case.

Acquisitions destroy value more often than not. And most of those deals are executed by teams with better track records than those of Naked’s current executives.

And when you consider the amount of stock Naked has sold, the operating business doesn’t look cheap, either. Naked has a fully diluted market capitalization of about $350 million, even with a share price of “just” 52 cents. Back out the cash and the operating business is valued at about $155 million or so.

What Are You Buying?

That’s a business worth a fraction of that amount just months ago. It’s a business that is an online player, yes, but with (at the moment) simply a third-party license for a second-tier brand (Frederick’s of Hollywood).

So we come around to the question that matters now. We don’t exactly know why NAKD stock soared in January, though we can guess. But we can ask why an investor would expect the stock to soar in May, or in 2022.

There simply aren’t very good reasons, at least not yet. Maybe Naked makes a home-run acquisition. Maybe the e-commerce business, which wasn’t growing that quickly before, suddenly takes off.

Neither seems all that likely, however. And investors shouldn’t be valuing those thin catalysts at more than $150 million. That’s why the effect of the January pump continues to wear off, and why NAKD stock is likely to continue on its downward trajectory for some time to come.

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 the article.

Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.

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