Stocks to sell

I know what it’s like to be aligned with the latest phenomenon in the market: r/WallStreetBets, the subreddit on social media platform Reddit that has driven failing video game retailer GameStop (NYSE:GME) to the moon. But when it comes to WSB’s latest target Naked Brand (NASDAQ:NAKD), I’ve got to reassess whether I’m an advocate of driving up names like NAKD stock or simply a strange bedfellow.

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Back in September of last year, I stated that Naked Brand stock wasn’t one to buy. Rather, it represented a barometer of consumer sentiment in the age of the novel coronavirus. If you think about it, NAKD stock is in some ways the ultimate barometer; as in, if you really believe Covid-19 is nonsense, then you wouldn’t mind getting intimate with a new love interest.

Of course, to get to home plate — are we still using baseball euphemisms? — you’ve got to “earn it.” That involves looking good and feeling good: exuding confidence, in other words. For many, nothing makes you feel more confident than wearing certain attire.

But as I suggested at the time, the data indicated that consumers are generally fearful of Covid-19 infection. I emphasized this point again in October, noting that Match Group (NASDAQ:MTCH) has performed very well following the initial devastation of the pandemic.

Basically, interest in meeting that special someone hasn’t gone away. But the medium to do so has. Rather than meeting in person, singles are spending much more time practicing contactless dating. Naturally, this strains the incentive to buy sexy undergarments.

Therefore, I didn’t like the business proposition underlining NAKD stock. Plus, you have pre-pandemic headwinds, such as millennials moving away from branded apparel. Therefore, in June 2020, I said NAKD stock would need a miracle to stay afloat.

Well my friends, miracles do happen! But before you attempt to walk on water, raise the dead or pass off grape juice as wine, you may want to consider your motivations.

NAKD Stock Perfectly Ignores the Other Side of the Coin

While it appears on the surface that the WSB folks are purely speculating, that’s not entirely the case. For instance, with NAKD stock, some of the gains are associated with good news for the underlying company. As our own Robert Lakin pointed out, Naked has plans to refocus its business toward e-commerce and expand its digital footprint.

However, plans are one thing. Execution is quite another. When you consider that on an adjusted basis, NAKD stock was trading hands at $775 just before making its ignominious decline, you’ve got to wonder: what the heck took so long?

Also, on an adjusted basis, Naked stock closed at a staggering $27,000 on May 31, 2013. This is a failing business that has completely lost relevance with the consumer. I’m not saying anything bad per say about management — it’s just that these things happen, even to the best of them.

So to pile into NAKD seems truly driven by spite against the hedge funds that are short the stock. Likely, the goal is to ruin short selling indefinitely, egged on by influential power brokers like Elon Musk of Tesla (NASDAQ:TSLA), who recently labeled short selling as a scam.

It’s a popular take. But it’s also terribly misguided.

Don’t get me wrong — I have no love for the hedge funds. And there’s zero doubt that all kinds of shenanigans exist on Wall Street, including taking overleveraged positions. But to attack the practice – I repeat, the practice — of short selling is ridiculous. At the end of the day, it’s just people taking the opposite side of the bet.

Indeed, the greatest irony of this mess is that the WSB folks that got rich off this zero-sum game called the stock market are blasting the very practice that makes zero-sum games possible in the first place!

It also ignores that short sellers deliver rationality and efficient value to the market, in large part by exposing overvalued or downright fraudulent organizations. That was the case with disgraced Enron. Per Wall Street Journal, a short seller found alarming details in the company’s regulatory findings.

You want to run up Enron stock too?

More Dangerous Without Shorts than With Them

Over the last few days, I’ve been hearing media pundits slam short selling because it destroys companies and therefore, puts their employees in breadlines and other desperate situations while Wall Street fat cats laugh at their pain.

Such takes seem slanted to me.

Yes, some of that stuff does occur, there’s no doubting that. But shorting is available to any qualified investor, lest we go too over the top with our opinions. I’m sure there are regular folks that are taking “negative” bets all the time. They’ve got families to feed as well.

And this is perhaps the most important point. By artificially and irrationally allocating funds to shoddy companies just because hedge funds are negative on them, that takes away investor dollars from enterprises that truly deserve them.

Which is to say, if you want to buy NAKD stock, that’s a choice you make. But to coordinate an effort to manipulate the free-market dynamics to benefit your side of the trade? I think we need to step away from the emotions and think about whether that seems reasonable.

On the date of publication, Josh Enomoto held a long position in GME.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.