Sundial Growers (NASDAQ:SNDL) is a long way away from the meme-fueled heights reached just 12 months ago. At the time, there was off-the-charts buzz surrounding U.S. Federal pot reform. Plus, who can forget the mad dash by retail traders into high-risk plays. These two factors helped SNDL stock skyrocket to prices nearing $4 per share.
But as the meme trend came and went, so did Sundial’s gains from this manic wave. Also, the company’s decision to exploit the madness, viaheavily dilutive secondary offerings, also had an effect on its stock price. Don’t forget the dimming hopes of a fully open U.S. pot market. Put it all together, and it’s no shock this former hot penny play now trades well below $1 per share.
That said, there is a silver lining. No longer trading at an inflated valuation, Sundial has become a value play. Yes, maybe not in the traditional sense. Instead of having a low price-to-earnings ratio, it has a negative one, as it’s still operating in the red. Deep value investors may prefer it if it were trading at a discount to book, instead of just over book value.
Still, it’s dropped to a price where downside may be minimal. Better yet, its shift in strategy gives it many paths back to much higher prices.
How SNDL Stock Became a Value Play
During 2021, I described SNDL stock as a“legalization lottery ticket.”That is, while trading at inflated prices, there was some merit in buying the Canada-based cannabis company as a moonshot play.
If the U.S. Congress made progress on legalizing marijuana, SNDL stock would nonetheless make an outsized move higher, despite its frothy valuation. This outweighed the big risk of it plunging to a price more reflective of its underlying value.
Of course, the opposite has played out here over the past year. Pot legalization went nowhere, as Congress put this increasingly bipartisan issue on the back burner. The end of the meme phenomenon, and the move to “risk-off” due to rising interest rates, has led tomass exodus out of penny stocks.Combined with the high shareholder dilution, Sundial shares have taken an 87.6% dive from their all-time highs.
This has resulted in heavy losses for those holding the, er, umm, five-dime bag. But for investors who have for a long time steered clear of this risky stock? Now may be the time to give it a closer look. It may now be a moonshot wager where the odds are in your favor. Meanwhile, Sundial Growers remains the largest holding, at 9.43%, in the 26-stock portfolio of pot-stock exchange-traded fundGlobal X Cannabis ETF(NASDAQ:POTX).
Multiple Shots on Goal
For now, it’s best to ignore the past angle with SNDL stock. Yet as you can see, for investors jumping into shares today, U.S. pot reform isn’t necessary to make this stock a great opportunity.
The shares open Monday at pennies above Sundial’s tangible book value. The flip side to last year’s dilution from capital raises is that it put a substantial amount of capital into the pot stock’s coffers.As of Sept. 30, it had over $800 million in cash and long term investments.
Trading for basically the value of this war chest, plus other tangible assets, downside risk going forward may be limited. When it comes to upside? In past coverage, I have discussedtwo strategiesthe company is pursuing that could help create value for shareholders in a big way.
Both have to do with putting to work the war chest it raised last year.
First, it’s using the money to make acquisitions. The deal most top of mind right now is its pending deal to buy Canadian cannabis and liquor retailerAlcanna (OTCMKTS:LQSIF). This transaction gives it a profitable business, plus cost-reduction potential. Sundial will be able to merge its SpiritLeaf retail unit into Alcanna’s majority-owned subsidiaryNova Cannabis(OTCMKTS:NVACF).
Second, it has made hundreds of millions worth of debt investments in other pot companies. That’s where the long-term investments mentioned above come in. These investments are profitable from the start and are high-yield to boot.
Verdict on Sundial Growers
Based on its last reported quarterly earnings, Sundial’sadjusted EBITDA has gone from negative to positive. AsInvestorPlace’sLouis Navellier argued last month, the company could see further profitability improvement in subsequent earnings releases, as it was only during this quarter (ending Sept. 30) thatits investment business got into full swing.
That’s not all. Cost savings from the Alcanna deal, plus improvements to its legacy branded cannabis business, could also result in much better numbers in the quarters ahead.
As it trades for near its book value, with multiple catalysts in play, SNDL stock is a buy at today’s prices.
Comments