Cannabis equities got a lift last week on news Aphria (NASDAQ:APHA) and Tilray (NASDAQ:TLRY) are merging, but Sundial Growers (NASDAQ:SNDL), isn’t the way to participate in a marijuana resurgence. Sundial Growers stock slumped almost 14% last week, extending its year-to-date loss to 85.51%.
Making Sundial all the more tempting and vexing to investors is that, like so many of its rivals, the company and its stock proved responsive to the results of U.S. elections last month.
There’s a lot of hope baked into weed stocks based on the incoming Biden/Harris Administration’s outlook on cannabis and some Republicans easing previously rigid views on the matter.
Follow the investable universe of marijuana stocks closely enough and one will rapidly learn that growth potential revolves around broader U.S. legalization. That’s a credible catalyst for Canadian growers that already have some positioning south of the border and those with decent balance sheets, something that’s hard to find in this industry.
Sundial has neither of those traits. In fact, an investor looking for an explanation for the aforementioned 85.51% year-to-date decline and the 44-cent handle at which the shares closed on Dec. 17 need only look to the company’s scant 4% share of the Canadian market.
That’s not encouraging in terms of gaining share in the U.S. even if Sundial had the resources to make that happen.
Sundial Growers Stock Is Cheap for a Reason
Investors always liked low-priced stocks due to the ill-fated perceptions of getting value and the ability to own more shares. That trend is being amplified this year as more active traders enter the market, call it the Robinhood Effect, embracing small price tag, junky stocks in search of quick gains.
That is to say Sundial is a movie investors have seen before. It checks all the boxes of operating in an interesting industry that garners headlines, low stock price, weak finances, need to raise capital, at risk of delisting from a major exchange and a reverse split could be in play.
Earlier this month, Sundial received permission to transfer its shares to the Nasdaq, buying the company 180 additional days to get in compliance with the exchange’s listing price requirement of $1. That buys it until June 2021 to get above that level.
Hey, anything is possible, particular with small- and micro-cap cannabis stocks, but bereft of near-term catalysts and home to weak fundamentals, Sundial Growers stock more than doubling to meet Nasdaq’s requirement isn’t likely.
That is unless the company deploys the band aid strategy of a reverse split. Absent a significant improvement in underlying fundamentals, all the reverse split is further delay delisting and give a short sellers a higher starting point for bearish positions.
Translation: Reverse Split Boulevard is a road frequently traversed by financially strained companies and the journey rarely pays off the firms and their investors.
Searching for Good News
For those insisting on being long Sundial Growers stock, perhaps the best thing that can be said of the company is that it recently pre-paid $50 million in liabilities, reducing its annual interest obligations by $2.5 million and its total liabilities to $22 million. That’s tolerable given the grower’s $39 million in cash.
That’s a step in the right direction and if the company can execute on its stated objective of a revenue stream of 80% from branded products and 20% from wholesale, perhaps there will be something to see here for investors.
Over the near-term, however, Sundial faces competitive and operational issues and there are higher quality cannabis names for investors to consider without incurring the risks that come with the group’s penny stocks.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.