Naked Brands stock rose almost 29 percent on June 2 and was up sharply in premarket on June 3. Why is the stock rising and how high could the meme stock go in what looks like short squeeze 2.0 driven by Reddit traders?
Naked Brands stock has been very volatile like all of the other meme stocks. It hit a 52-week high of $3.4 amid the short squeeze mania but eventually fell sharply. Even now, it trades below $1, which puts its listing only in question. Many people speculate that the stock will have to do another reverse stock split to remove the hanging sword of delisting. Several other penny names including Castor Maritime have recently gone for a reverse stock split.
Naked Brands short squeeze
A short squeeze has become a dreaded word for a lot of hedge funds. Retail traders have successfully taken on Wall Street pros and nearly triggered the downfall of at least one hedge fund. Short sellers have lost billions this year amid the rally in meme stocks like GameStop and AMC Entertainment.
Looking at Naked Brands, its total short volume was over 150 million shares on June 2, according to the data from Fintel. The short volume was over a third of the total volumes on that day. A lot of short positions were built on the stock, which could get painful as the stock looks set to rally more.
Reddit short squeeze 2.0
After being in hibernation for a few months, Reddit traders are back with a vengeance. AMC Entertainment is above the price level where it was in the short squeeze 1.0 in the first quarter of 2021. Other meme names including Zomedica, Naked Brands, BlackBerry, and Koss Corporation have also risen sharply over the last week.
Naked Brands is a cash-rich company
While short squeezes can be a short-term price driver, they usually don’t have a long-term impact on the prices since stocks eventually settle near their fundamental values. However, we’ve seen the rule books rewritten in 2021. Companies have used the short squeeze to sell shares in a flurry.
A lot of zombie companies that otherwise would have found it hard to continue their business are now cash-rich with zero debt. Talking of Naked Brands, it's also a debt-free company with $270 million as cash. The stock’s market capitalization is less than $640 million. The company intends to use the funds for acquisitions.
Turnaround in NAKD stock
Like all of the stocks pursued by Reddit, NAKD has a fundamental turnaround story. It has exited the perennially loss-making Brendon retail operations, which means that the capital can be deployed in other accretive avenues. The company wants to grow the Frederick's of Hollywood online business while looking at attractive investment opportunities to deploy the massive cash pile.
The pivot towards e-commerce was also the key theme in the bullish narrative for GameStop, which under activist investor Ryan Cohen is working to scale up its online sales. Now, e-commerce has been probably the best-selling story over the last five years.
Overall, NAKD Brands is a turnaround story. The near-term financials might not look encouraging like most other Reddit stocks. However, looking beyond the near-term earnings, the pivot to e-commerce, which can hopefully be more profitable than its retail operations, can drive long-term value.
As part of its transformation, Naked Brands has reappointed Justin Davis-Rice as the CEO and appointed Mark Ziirsen as the CFO. Even GameStop made several changes in its top management amid the apparent changes pushed by Cohen.
NAKD stock is up sharply over the last month. I was bullish on the stock a month back and continue to be bullish in the near term. The Reddit-driven rally can take the stock even higher and it could possibly hit $1 soon.