What happened

The WallStreetBets short squeeze continued to unravel this morning with investors pocketing gains and latecomers hoping for a second bounce. Stocks made popular on the Reddit stock trading board fell in unison this morning with Express (NYSE:EXPR)Bed Bath and Beyond (NASDAQ:BBBY), and Naked Brand Group (NASDAQ:NAKD) among the names pulling back.

Express was down 31.4% this morning, Bed Bath and Beyond gave up 13.8%, and Naked Brand was off 37.6%.

A red arrow going down in front of a stock chart

Image source: Getty Images.

So what

A number of factors are driving the ongoing sell-off as all three of these stocks peaked last week. The first is that many short-sellers closed out their bets as the stocks soared last week, riding a massive short squeeze and gamma squeeze. Second, savvy traders who rode the stocks up sold it to take profits. Third, fundamentals matter, and stocks will naturally revert to their mean barring any significant change in fundamentals. After all, a stock is a part-ownership in a business, not a lottery ticket.  

So the possibility of a short squeeze is diminished, and the "easy money" has come and gone. Traders who now buy any of these three stocks are banking on another pump-and-dump rally to lift them, which seems unlikely as markets adapt quickly and have reacted to this situation. Investors should also be aware that all three of these stocks are still significantly above their historical trading level and their fundamentals are weak, meaning they could fall significantly further.

Express, the mall-based apparel retailer, is still up triple from where it was just two weeks ago even though the company has been struggling for years. Those challenges have only intensified during the pandemic as comparable sales plunged 30% in its most recent quarter, and the company is burning cash and going deeper in debt to survive crisis.

Bed Bath and Beyond, the home goods retailer, is in the midst of a promising turnaround, but that company also faces structural challenges as it sells off noncore banners and tries to compete with more nimble e-commerce operators. Bed Bath and Beyond stock is still up about 40% year to date, but investors should focus more on the fundamentals related to the company's transition, rather than hoping for another pop with a short squeeze.

Naked Brand Group, a maker of swimwear and intimate apparel, is still priced at double what it was a week ago. The company smartly capitalized on the stock pop to sell $50 million worth of shares at $1.70 yesterday, but diluting shareholders only makes the prospects of another short squeeze less likely. In its last fiscal year, revenue declined 20% to $58.5 million and it posted a net loss of $33.9 million, showing the underlying business is still in poor shape.

Now what

With these three stocks falling and GameStop and AMC Entertainment also plunging, the short squeeze that lifted the group of WallStreetBets stocks appears be coming to an end. In cases like these, selling tends to provoke more selling as momentum traders don't want to lose more money and that feedback cycle only exacerbates the sell-off.  

Despite the hype around the Reddit stocks, at this point buying any of these names is a bad move. You're much more likely to lose money than to make money.