The short bursts with Reddit fuel of GameStop (NYSE: GME) and other stocks that were significantly shortened earlier this year will take the idea of “meme stocks” – shares that are strongly encouraged on social media platforms – into the public eye. market in general.
Some of these meme stocks have core industries that can allow them to withstand a market downturn. However, there are many others with businesses that cannot support their appalling valuations. We take a look at two meme stocks that are likely to shoot the shareholders the next time the market falls.
1. Brand Naked
Sections of Naked Brand Group (NASDAQ: NAKD), a New Zealand-based retailer of close-fitting and swimwear, from around $ 0.07 last October to a full-time high of $ 3.40 at the end of January. Almost everyone was knocked out of that rally and hung on – the stock was now trading at around $ 0.77 per share.
Image source: Getty Images.
Naked rally had nothing to do with its basics. It was identified as a short-term target on Reddit, and was mentioned in conversations about “shorting naked” – the illegal use of shortening stock without first borrowing. Those conversations inevitably became a move to promote the stock on Reddit, which led to a rally with GameStop and other meme stocks in January.
However, Naked Brand’s core business is a lie. Its revenue fell 20% to $ 58.5 million in its fiscal 2020, which ended in January 2020, and its net loss expanded from $ 32 million to $ 33.9 million. It has not published their annual report for fiscal 2021.
Over the past year, Naked has left the U.S. wholesale market, reduced its presence in Europe, removed its Bendon brand, and expanded its e-commerce platform. However, it is doubtful that these conversion efforts will work when major players like it L BrandanVictoria’s Secret is still struggling.
Naked was capitalized on a Reddit-fuel rally to sell $ 50 million worth of shares at $ 1.40 apiece in January, followed by another $ 100 million private place sale in February at $ 0.93 per share. He says the money will be used to fund e-commerce expansion, but it is still overvalued right now with a market cap of nearly $ 500 million – or 8 times last year’s sales.
2. Koss
Sections of Koss (NASDAQ: KOSS), a headphone maker that started more than 65 years ago, has been trading below $ 5 for years but rose to a high of $ 127.45 at the end of January amid a brief push with Reddit fuel.
But just like Naked, anyone who chased off the Koss rally and didn’t get out in time lost – and perhaps a big one – as the price of the stock fell back into the mid-teens. The correction should come as no surprise to anyone, as Koss’ s annual income has fallen for four straight years.
Image source: Koss.
Koss’s revenue declined 16% to $ 18.3 million in its 2020 cap, which ended in June, and posted a net loss of $ 500,000. It has been unprofitable for the past three of four years.
Koss’s problems are easy to spot: The low-end smartphone market is hoarding, and the company has little price power against high market leaders like Sony no Bose.
On the bright side, Koss’s revenue rose 6% year-over-year to $ 10.1 million in the first six months of its 2021 fiscal year, thanks to its recurring sales in the U.S. and the U.S. Europe, higher online sales, and the impact of a stay-at-home trend. Koss generated a net profit of $ 600,000 during that period, though most of that ($ 500,000) came from a pardoned Small Business Administration loan he issued through the pandemic.
Koss’s growth could stabilize this year, but the company is still valued at nearly $ 140 million – or 8 times last year’s sales. That high price-to-sale ratio would be more appropriate for a high-tech stock than a struggling headphone maker.
Perhaps that’s why executives, executives, and even members of the Koss family put down shares worth more than $ 44 million in late January before the price of the stock fell back to earth.
Do your own homework
It might be a shame to follow the crowd into the meme stocks promoted on Reddit or TikTok instead of doing their due diligence, but it is dangerous to run blind these rallies. Naked and Koss are clearly two of the worst criminals, and investors who hope their stocks return are more likely to be disappointed when they are crushed in the next market crash.
This article represents the opinion of the writer, who may not agree with the “official” recommendation position of the Motley Fool chief consulting service. We are motley! Questioning an investment dissertation – even one of our own – helps us to think critically about investing and make decisions that will help us become softer, happier and richer.