Under $1, Naked Brand Group Is Trading Where It Belongs

A friend recently asked me the dumbest stock I’ve written about in the past 12-24 months. I answered that I’d have to think about it. However, if we’re talking about recent months, Naked Brand Group (NASDAQ:NAKD) and NAKD stock would be at the top of the list. 

In November, I wondered why it was still trading on Nasdaq. In January, before all the “meme stock” craziness, I said investors shouldn’t fall for the company’s efforts to leave penny-stock status.     

Bloomberg wrote in early February that NAKD led a group of 16 meme stocks whose share prices were up more than 100% year to date. At the time, NAKD was up 546%. As I write this, it’s trading at 99 cents, up about 415% year to date. 

Under a buck, NAKD stock is trading where it belongs. Here’s why. 

It’s Not a $400 Million Business

InvestorPlace’s Vince Martin does a good job explaining why Naked Brand’s share price isn’t worth more than $1 at the moment, which equates to a $473 million market capitalization. 

That’s before taking into account a share offering that could dilute shareholders if the 107 million warrants sold as part of the offering are exercised at $1.13 a share.

So, let’s assume, for argument’s sake, that NAKD jumps about another 25% to $1.25 a share, and the warrants are exercised. Naked Brand’s valuation skyrockets to $863 million or 34.5 times sales if we use Martin’s calculation of $25 million in the e-commerce segment. 

If you look at the ProShares Online Retail ETF’s (NYSEARCA:ONLN) top 10 holdings, you will see that the average price-to-sales ratio is 7.x or one-fifth the multiple for Naked Brand. 

If you go with my colleague’s valuation, which backs out the $200 million in cash raised by share sales, and the divesting of its Bendon subsidiary, you’re still looking at a multiple of 17x sales.

In the ETF, only Magnite (NASDAQ:MGNI) would have a higher multiple at 19.3x sales for the latter.

It might not be filing for bankruptcy in the immediate future, but you can be sure its Fredericks of Hollywood e-commerce business won’t get Naked Brand a spot among the ETF’s 26 holdings.

Despite the improvements to its balance sheet, it’s nowhere near ready for prime time.

Better Options Than NAKD Stock

The most obvious option is the ProShares ETF itself. Investing in 26 stocks that benefit from online retail in some way, you’re getting a diversified bet on e-commerce growth with Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) accounting for 23.96% and 11.55%, respectively. 

If you wanted to go the single-stock route for your e-commerce bet, I recommend Amazon or Alibaba over Naked Brand.

Virtually every article written by InvestorPlace contributors since the “Reddit Rally” began at the end of January has been negative about Naked Brand’s stock. 

However, InvestorPlace’s Alex Sirois suggested at the end of February that there didn’t appear to be a lot of risk based on the stock’s share price. He stated that the cash it brought in from the sales, if properly allocated, could turn Naked into a winner. 

Ultimately, though, he recommended investors pass because the company doesn’t have a track record for doing much successfully. 

I would agree with this assessment.

Proper capital allocation is as much an art as it is a science. It’s definitely not as easy as it sounds. The company still has to execute its plan. History is littered with companies who’ve had a plan but failed to execute it.

In January, I said I wouldn’t touch NAKD stock with a 10-foot pole. The share offerings might have dropped that to a five-foot pole. 

Under $1, it’s definitely trading where it belongs.   

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

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. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.