Naked Wines’ (LSE: WINE) share price spiked yesterday. When the market closed at 4.30pm, shares in the subscription wine business were sitting at 122p – 29% higher than the previous day’s closing price.
So what was behind the huge share price increase? And is the stock – which has tanked over the last year – worth buying for my portfolio today?
What drove the price spike?
The main reason Naked Wines shares surged yesterday was that the company released an operational and financial update and this was received well by the market.
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In its update, the company said it has taken steps to reconfigure the business, which has performed poorly of late. Specifically, management said it had:
- Renegotiated its banking facilities to ensure that the company is well funded (it had £64m of available liquidity at the end of September).
- Taken decisive action to focus on profitability (instead of focusing on growth), and reduced marketing investment that was not delivering satisfactory returns.
- Restructured some of the company’s teams to create a leaner and more focused business.
The company believes these steps will lay the foundation for a return to sustained, profitable growth.
In terms of guidance, Naked Wines said it expects adjusted earnings before interest and tax (EBIT) for the six months to the end of September to be around £4m – around three times the year-earlier figure. And for the year ending 28 March 2023, it expects to deliver adjusted EBIT of £9m-£13m, with further improvement expected the following year.
Explosive move higher
As for why the stock’s move to the upside was so explosive, my hunch is that there was a bit of a ‘short squeeze’ here. According to my data provider, around 4.5 million Naked Wines shares were being shorted in the lead up to the update (around 7% of the company’s free float).
Clearly, short sellers – who profit from falling share prices – were expecting the update to be disappointing. However, it was actually not that bad. So short sellers will have scrambled to buy stock to close out their short positions, and this will have pushed the share price up significantly.
Are Naked Wines shares worth buying?
Would I buy Naked Wines shares today? No, as I don’t see them as a good fit for my portfolio.
When I invest in small-cap stocks, I generally go for companies that have an excellent track record when it comes to profitability. I like to see consistent growth in profits and a high return on capital. I’ve found that this dramatically reduces my investment risk.
Looking at Naked Wines, its profitability track record is quite poor. In three out of the last six financial years, it has generated a net loss. And when it has made a profit, its return on capital has been quite low.
Now, as I mentioned above, Naked Wines is focusing its attention on profits. This is a good thing. However, it remains to be seen whether it can put together a solid track record on this front.
So I’m happy to pass on the shares for now. To my mind, there are better stocks to buy for my portfolio today.
