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.

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.

So, is this a bin end bargain for my portfolio? Or does the massive fall signal deep problems that ought to keep me way from the shares?

Compelling business model

The interesting thing about the company for me is that I think it has a great business model. By replacing the middleman in wine sales it can make attractive profit margins. The more it sells to customers, the better it can understand their tastes, which should mean they become increasingly attached to Naked Wines. That should give it pricing power.

The online wine retailer saw sales boom during the pandemic. But Naked Wines is more than a one-trick pony. Over the past five years, it has seen sales grow at a compounded annual rate of 20%. I think that is impressive.

Naked Wines’ model relies on upfront marketing investment to attract buyers, which is then hopefully more than recouped in the years that follow if they keep buying. So after a year, the marketing investment in attracting and retaining a customer has already been more than covered. After five years, the company’s model suggests that it will have recouped triple the money it cost to attract the customer. I regard this as a virtuous circle. By retaining customers, Naked can get more value out of the relationship over time.

Why is the Naked Wines share price falling?

But if the business model is potentially so attractive, what explains the huge fall in the Naked Wines share price?

The main problem is translating sale growth into profits. Last year, sales grew 3% year-on-year to £350m. But the company’s loss almost doubled, to £11m.

That is not how I like a business to work. As sales grow, if the business has a lean cost base, profits ought to grow even faster. The opposite is happening at Naked Wines. There are lots of good reasons for that, from the cost of expanding its international footprint to the impact of higher costs for everything from glass bottles to packaging materials.

Some of those things are within the company’s control, but a lot are not. If it passes on all cost increases in the form of higher prices, it could lose customers. That is a challenge to its business model of investing early in the customer lifecycle with the aim of recouping those costs down the line.

I’m not buying

I really like this business and think it has loads of potential. It has a strong competitive advantage that can help keep its customer base loyal.

However, the reality is that right now it is struggling to show that it can be profitable on a sustained basis. That is the opposite of what I am looking for when I invest. The share price could go up from here if business improves, but it might also keep sinking if losses get even bigger. So until the bottom line improves, I will not be buying Naked Wine shares.

AO World

I’ve been bearish on electrical retailer AO World (LSE: AO) for, well, years. The huge spike in the share price during 2020 did little to arrest my fears that this company would struggle to outgun rivals in what’s an incredibly competitive space. Well done to anyone who managed to play this momentum game and win.

The actual date on which full-year numbers will be revealed is still to be confirmed. Even so, I think I can safely say they won’t be good. The company has already reported that customers are cancelling warranties as the cost of living climbs. I can’t imagine a lot of people are rushing to buy white goods right now either.

The question is whether this is still to be fully reflected in the shares. Despite tumbling 27% in 2022 to date and 70% in the last 12 months, I’m not sure it is.

I’m not alone. The small-cap continues to feature in the list of most shorted stocks on the UK market.

Of course, AO could bounce hard if it reports even slightly better-than-expected trading. But that level of speculation is better suited to traders rather than Foolish investors like me.

Moonpig

Greetings card supplier Moonpig (LSE: MOON) is a second growth share I’ve long been wary of due to the hyper-competitive market in which the firm operates.

Again, my cautious stance has been vindicated. Moonpig’s share price is down 37% in 2022 and 50% since last May.

This isn’t to say there’s nothing to like here. It’s got a decent brand (boosted by that memorable jingle) and has been busy building a more diversified selection of gifts on its site. The company also upgraded its revenue target for the year from £285m to roughly £300m back in April.

However, a valuation of 20 times earnings still strikes me as rich considering the lack of ‘economic moat’ (as Warren Buffett would say). Customer loyalty levels may be above pre-pandemic levels but that may reflect the migration of shoppers online rather than anything about Moonpig specifically.

Naked Wine

Like AO World, drinks seller Naked Wine (LSE: WINE) was a huge beneficiary of the multiple UK lockdowns. Understandably, that purple patch could only last so long. Accordingly, this growth share is down 43% in 2022 and almost 60% in one year.

There’s an argument that a bottle of wine is just the sort of cheap luxury that people will treat themselves to in tough economic times. Once again, however, I’m struggling to discern any true advantage over rivals. For many people, I imagine a bottle of plonk from the nearest supermarket may suffice. I could be wrong, of course, and ominously, Naked Wine also appears on the list of most-shorted stocks too.

I can see things getting worse before they get better for the Norwich-based business.

Full-year numbers are due on 9 June.

Naked Wines’ positive trading update

Clearly, investors are encouraged by numbers like a 72% increase in its sales over a two-year period, for the year ending 28 March 2022. Its sales over the last year show a much smaller increase of 3%, but even that is a positive in my view. Lockdown sales were expected to be unusually high as we did not have the option of going out for a drink. If anything, I would have expected a drop in sales from last year, given that much of its financial year covers the post-lockdown period.

Its sales retention, which is the percentage of revenues derived from existing customers, is at an impressive 80% too. The fact that the company has been able to retain customers even after the pandemic, is an achievement in itself. But it gets even better when it is higher than expectation of a mid-70s guidance. It has also reported pre-interest and tax profits. 

What has changed for the AIM stock?

At the same time, I cannot help but notice that the broad trend is not particularly different from the first-half update released in November last year. Its two-year sales were still strong, as was customer retention. And it had swung into pre-tax interest and profits as well. Yet, at the time, its share price had fallen more than 9% in a day. 

So what has changed? I can spot two differences. First, it sounded less optimistic in its outlook then. For instance, it expected the impact of higher costs and supply chain challenges on profit margins. Second, as per a Bloomberg report I read earlier today, the latest numbers have exceeded analyst expectations, who believed that Naked Wines would report losses. This is the opposite of what happened the last time, when its sales growth was lower than anticipated. 

Would I but the dirt-cheap UK stock?

This says to me that Naked Wines’ future looks positive. Its results are better than expected and its outlook is positive too. The stock price for the customer-funded online retailer, which sources from independent wine makers, however, is now close to levels it last saw right after the lockdowns started in March 2020. This is despite significantly higher sales since then, which makes it surprisingly cheap.

Consumer expenditure might be impacted if inflation continues to rise, of course. And this could impact wine sales. But I think over time the AIM stock will still be a good one for me to hold. I will buy this dirt-cheap UK stock. 

Dividend stocks

The reason I’m choosing dividend stocks is that whatever happens to the share price, I get a return for my holdings. I do have to remember thought that companies are under no obligation to pay a dividend.

Lloyds Bank (LSE: LLOY) has been cutting costs everywhere it can, closing branches up and down the country. It is one of the few firms set to gain with rising interest rates and is making significant moves into the UK rental property market. Its dividend payment of 2.49% is small, but manageable, and will balance out my riskier investments.

Imperial Brands (LSE: IMB) pays a much heftier dividend at 8.61% and has managed to pay at least 7% to investors every year since 2002. While tobacco use is on the decline, IMB has taken significant strides to streamline its business during the pandemic. So far in 2021, it has made £1.6bn in profit and has committed large amounts of revenue to developing new, safer products for its customers. I believe that despite the bad press, tobacco has staying power and will remain relevant for another decade at least.

Growth stocks

Naked Wines (LSE: WINE) was founded in 2008 but really burst onto the scene during the pandemic. The wine retailer moved the vast majority of its operations online right before the start of lockdown and proved itself to be an invaluable service to those of us stuck at home with nothing to do. Low overheads allow for it to offer good quality products at affordable prices and its ‘Angels’ subscription programme has built up a sizeable repeat customer base. Growth has slowed since the end of lockdown, but I believe that the subscriptions will provide it with a consistent source of revenue, while low prices and convenience of wine delivered to our doors will continue to add new customers to that list.

Argo Blockchain (LSE: ARB) is easily the riskiest investment on this list. The world of cryptocurrency and blockchain tech is still largely uncharted territory. It may all come crashing down tomorrow for all I know. But with high risk comes high reward. Right now, ARB trades for 131.4p on the London Stock Exchange, a pullback of nearly 50% since its all-time high of 282p in February. I really believe in the future of cryptocurrency but I think excitement over bitcoin pushed the share price higher than was sustainable. Now it has settled at a more reasonable place, it would be remiss for me not to invest in the infrastructure that makes cryptocurrency possible.

Conclusion

All of these investments come with risks. But understanding the investments and planning to hold for the long term is how I am able to minimise them. UK stocks have a lot of potential and I’m going to be sure to take as much advantage of that as I can.

Solid fundamentals

Naked Wines saw a near parabolic rise over the course of the Covid-19 pandemic. By sheer chance it had gone through a period of serious restructuring, closing its stores and moving entirely online, which left it poised to take full advantage of our extended stay at home.

It has excellent profit margins on most of its products as well as exclusive access to the majority of the wines it sells. It also operates a partial subscription model which continues to bring in revenue even as sales slump.

In fact, while the words sales slump may be billboarded on most articles about it, sales still grew by 1% over the past six months. While this number isn’t anything to write home about, growth is growth and year on year, Naked Wines has actually grown 68% between now and 2020. Gross profit margins have increased from 38% to 40% in that same time.

Subscribers have also grown by 25%, meaning that Naked Wines is continuing to attract new customers even as the majority of people are choosing to spend their money out in bars.

Why the crash?

I believe that we are seeing a share price contraction only because the price rose too high too quickly. Investors tend to get excited when they see percentage growth in the double digits, but a company needs to maintain that growth to justify its share price. If results fall short of expectations, shares tend to fall.

This is exactly what we have seen today. No losses, no shrinking, just a failure to meet high expectations.

Winter outlook

Company management seem sure that the holiday season will bring sales back on track. Large family gatherings are, in my experience, best enjoyed with ample access to alcohol. And who knows, another lockdown may well trigger a boost in orders. Or the novelty of drinking in a bar may wear off if food and drink prices continue to rise.

But no one can be sure of what the future holds. It may be that as fuel and food prices rise, people choose to end their subscriptions or cut back on luxuries. If this happens, then the share price may continue to fall.

Is now the time to buy?

When I last wrote about Naked Wines, I said that I wanted to wait and see how an end to lockdowns would affect sales. I was right to steer clear then, but is now the time to add it to my portfolio?

Adding it is a risky move, but I think the fundamentals are all here.

This winter is make or break. If Naked Wines can, at the very least, hold onto its subscriber base, then I think this price correction will stabilise around the 500p mark. If it can increase its subscribers over the next six months, then I think we will see a more sustainable increase in the share price.

What is ‘Naked Wines’?

Naked Wines is an online retailer specialising in the sale of wines and spirits. Its stated goal is to provide quality wines at low prices by acting as a direct channel between independent winemakers and customers.

What makes Naked Wines unique is its ‘Angels’ system. Angels are customers who choose to pay a subscription fee of £20 each month. This money is then used by Naked Wines to help fund independent winemakers around the world. In return for this subscription, customers gain access to a slew of discounts, ranging from £2-£6 per bottle, as well as exclusive wines unavailable in stores or to non-Angel customers. The subscription fee can also be redeemed as credit when making purchases later on.

Not a bad deal if you ask me.

But with all of these cost cutting measures in place, I wondered if Naked Wines was able to make any money at all.

Revenue and profits

Before the pandemic, Naked Wines was struggling financially. In 2019, the company lost a staggering £9.4m, prompting it to sell off two of its subsidiaries and become a completely online business. This transition was completed in March 2020 and could not have happened at a better time.

Following international lockdowns, Naked Wines went on bring in £202.9m in revenue for the 2020 fiscal year, an increase of 13.7% over the previous. It seems people were very happy to buy wine online while they were furloughed at home.

This growth trend has continued through 2021. The company increased revenue by 68%. That’s £340.2m so far this year. I believe this leap can be attributed to expansion into the US market.

The number of Angels has also increased by 53%, which is good for long-term stability.

Reservations

If the company is able to maintain or expand its customer base, I think the share price still has a lot of room to grow. However, I am hesitant to add Naked Wines to my portfolio today for one reason. Economic uncertainty.

I’m reading a lot about the UK possibly entering into recession. If this turns out to be true, we may now see a long period where households are forced to cut unessential costs, such as their monthly wine subscription.

Naked Wine customers may well consider their Pinot Noir to be essential. As we have seen, sales of alcohol do often go up in challenging times. But for now I’d rather wait and see how the market plays out before I add Naked Wines shares to my portfolio.

Victory in Wednesday night’s Euro 2020 semi-finals doesn’t just give soccer fans something to shout about, however. Taking on Italy in Sunday’s final also provides opportunities that should excite UK share investors.

Here are three UK shares that stand to gain from England’s recent achievements.

It’s party time!

Alcohol retailers like Naked Wines (LSE: WINE) are reaping the rewards of England’s long run in this year’s European Championships. The reverie that will last all weekend (and possibly longer depending on Sunday’s result) means that they should continue to enjoy a roaring trade for the next few days at least.

It’s true that easing Covid-19 restrictions could hit Naked Wines’ revenues in the near term as people go out more. But I still think the UK retail share offers plenty of investment potential. In particular I like its focus on North American markets, and think this could deliver exceptional returns now and in the future.

Betting on England

UK gambling shares like Entain (LSE: ENT) look set to thrive whether or not England prevail in Sunday’s final.

As analysts at Hargreaves Lansdown have commented: “England’s semi-final victory will be a double cause for celebration in the Entain offices”. They describe England’s participation in Sunday’s final as an “open goal for the group” amid a boon in sports betting.

They added that “England’s long run in the tournament may well have been a contributing factor to the news that underlying cash profits are expected to beat consensus at the full year”.

The FTSE 100 company isn’t just a great pick for the short term though, as the online betting segment looks set to run and run. Entain’s online net gaming revenues rocketed 22% in the first half, with internet sales rising for 22 quarters in a row. I think this makes the UK share a great buy, despite the ever-present threat from regulators.

A top UK retail share

England shirts have been selling like proverbial hotcakes since Euro 2020 began. And demand for Three Lions-related merchandise has shot through the roof in the wake of yesterday’s semi-final victory. Naturally a win in Sunday’s ultimate game will give sales an extra shot in the arm at sports retailers like JD Sports (LSE: JD).

The FTSE 100 firm could also expect sales of boots, balls, shin-pads and other soccer-related equipment to rise after the tournament ends. This is because successful tournaments tend to drive participation in whichever sport is riding high.

While JD Sports faces extreme competition, I think the strength of its retail brand, allied with its expansion globally makes it a top UK share for the near term and beyond.

Naked Wines: strong sales growth

Naked Wines reported a 68% increase in sales for the year ending March 29. As more people made online purchases, the company, which funds wine producers and sells online, gained. I would be concerned about its net loss in other circumstances. But it explained that it was due to a big rise in investment in new customers. Also, its profits from repeat customers have strengthened significantly. 

It is also positive on its outlook. In fact, it is one of the few companies I have covered recently to have provided concrete guidance in an uncertain year. This reflects its confidence to me. I think improved numbers will be supported by economic growth. Naked Wines is focused on the US market, which contributes to around half its revenues. The US economy is going strong and that is likely to continue.

The one risk I see is that as consumers step out more to wine and dine, there could be a slowdown in demand for online orders. But since overall consumer demand should rise, that issue may have little impact. I think the risk is limited. 

Alphawave IP: future positive

Alphawave IP is another company to release a positive update. The chip-maker provides high-speed connectivity solutions to data centres. These are for 5G wireless infrastructure and autonomous vehicles, among other uses. It reported “record results” regarding the number of bookings earlier today. For the first half of 2021, the Canadian company booked orders of $190m. This included both new wins and business with existing customers. 

The company, which was listed on the London Stock Exchange’s main market only a month ago, saw explosive growth in 2020. From the numbers for 2021 so far, it looks like this year will also be a good one for the company. Alphawave IP’s share price is up over 2% in today’s trading on the news, indicating renewed investor interest in the stock.

In the days following its weak initial public offering (IPO) in the UK last month, its share price fell and remained relatively muted. However, today’s news could mark a break in that trend. But it remains to be seen what happens next. Even with the gains made so far today, its share price is still below the 380p levels seen shortly after it was publicly listed.

My takeaway for the UK shares

On the whole, both UK shares look good to me. There are of course downsides to keep in mind. But I think both are growing companies that could prove to be lucrative investments over the next few years for me. 

Naked Wines’s share price has trended lower in recent weeks, though, as the emergence of the Delta coronavirus variant has pushed infection rates higher again. This has fuelled fears that the government’s plans to fully re-open the hospitality and leisure sectors on 21 June could be disrupted. It has also cast a cloud over the extent of social gatherings in the UK.

Naked Wines has dropped a further 6% in Friday trading, too. It was last trading at 746p per share despite announcing a sharp sales increase for last year.

Revenues soar but losses increase

Today’s full-year trading statement showed revenues soar 68% during the 12 months to March 2021, to £340.2m. Naked Wines said that this had been driven by “the accelerated channel shift to online wine purchasing due to Covid-19, investment in customer acquisition and favourable customer retention and frequency trends”.

The AIM-quoted firm said that it had enjoyed “strong” growth across each of its US, UK, and Australian territories. But it said that turnover was particularly robust in its North American marketplace. Revenues here soared 78% year-on-year to £161.7m.

The number of active customers at Naked Wines climbed 53% from the previous year to number 886,000, it said. But a soaring top line couldn’t stop the e-retailer recording another annual loss. This clocked in at £10.7m, widening from the £5.4m reversal it endured in fiscal 2020.

A bright start to the new year

Losses at Naked Wines worsened last year as the company doubled-down on investment to attract new customers. The company spent £50m in financial 2021, up 117% from what it spent the year before. And Naked Wines plans to continue spending heavily and has earmarked a budget of £40m to £50m on similar activities like advertising in the current fiscal period.

The company said that sales in the first two months of financial 2022 were up 8% year-on-year. It has forecast full-year sales of between £355m and £375m too.

Here’s what I’m doing about Naked Wines

City analysts think that Naked Wines will endure another pre-tax loss this year. But they believe this will narrow to around £3.3m. Current consensus suggests that the business will break into the black with profits of £4.3m in financial 2023.

In my opinion there’s a lot to get excited about with Naked Wines. Its online-only model could provide plenty of upside as e-commerce takes off. It is also impressively expanding margins at it focusses on its fast-growing US marketplace. But I worry about whether or not the UK retail share is massively overvalued at current prices (it trades on a forward price-to-earnings ratio of 98 times for next year). I’m happy to pass on Naked Wines today and buy other British stocks instead.