Sundial Growers Turns Back the Clock

The cannabis industry heading into 2021 continues to flourish. Growers, dispensaries and recreational use-space entrepreneurs should expect a bonanza in the years ahead. That’s not to say every company has enjoyed smooth sailing, especially Sundial Growers (NASDAQ:SNDL) stock.

a handful of marijuana buds
Source: Shutterstock

Since it bowed in August 2019, SNDL stock has impersonated a setting sun, dipping from $11.70 to 49 cents per share.

It’s been one ugly, unabated ride down. Those ensconced at the company’s Calgary headquarters have grappled with financial restructuring and no doubt done some soul searching. If pot is hot and marijuana’s where it’s at for investors, how did things turn out this bad?

This much can be said: Sundial isn’t the only Canadian cannabis company to weather recent turbulence. Canopy Growth Corp. (NYSE:CGC) bungled its way through weak demand and spotty distribution, problems that led to the ouster of co-founder and co-CEO Bruce Linton.

The good news is that Canopy stock has since found its footing. Can Sundial Growers stock do the same?

SNDL Stock Gets a Fresh Start

On Dec. 21, Sundial announced that it had finished a financial restructuring and had achieved debt-free status. If you’ve recently paid off all your credit cards, you know the feeling of relief. And if you had to cash advance those same cards to get through the novel coronavirus pandemic, you also have a sense how Sundial got in trouble in the first place.

Just two quarters after the Sundial Growers’ IPO, the company began to run out of cash and eventually amassed more than $200 million in debt. That might not sound like much until you consider that the company’s market capitalization – its total value as a public entity – is just $363 million. It took a combination of asset sales, debt-for-equity swaps, capital raises and cash repayments to get Sundial back on solid ground.

But where does Sundial go from here? A restructuring of this order yanks most if not all of the financial rabbits out of the hat. Fortunately, SNDL stock has a second shot to harness the tremendous tailwinds driving the cannabis industry.

Seizing a Sector’s Ascendance

While most of us got caught up in the drama of election season, a fairly under-the-radar bill came within days of a September vote in the U.S. House of Representatives. The Marijuana Opportunity Reinvestment and Expungement (MORE) Act should pass the House easily in 2021 and perhaps the Senate as well. The bill’s co-sponsor there was none other than Vice President-elect Kamala Harris and more than a few Republican senators could see the business sense behind making marijuana legal on a federal level.

Regardless, four more states made recreational use legal on Election Day: New Jersey, Arizona, South Dakota and Montana. If you take the long view, consider that pot was a banned substance across the U.S. until Colorado fully legalized it in 2012.

No matter how slow or fast the Marijuana Express runs from here on out, the train has definitely left the station. It’s estimated that the sector could generate up to $130 billion annually into the U.S. economy by 2024.

Yet it’s difficult to figure out where SNDL stock fits into all of this. On the one hand, wiping the slate clean of debt should count for something. Meanwhile, the company’s revenues are forecast to increase by 20% in 2021. But on the other – and don’t choke on your roaches, folks – the five analyst firms covering Sundial agree that the projected $69.4 million should be more like $82.6 million.

Does Wall Street Need a Reset, Too?

In other words, up is down to these analysts and so the consensus is glum. They yanked their Sundial Growers stock price target down 43% to 31 cents per share, when the stock only trades at 49 cents. So to recap, 20% up equals 43% down, and a predicted 35% drop in share price. Ain’t Wall Street math fun?

Well, it may be off. For folks that pride themselves on numerical precision and Fibonacci curve pyrotechnics, these analysts as a lot have cast their nets ridiculously wide. Share price projections range from 16 to 79 cents, which either amounts to a huge gain or a huge loss. What’s more, all this action went down in November and so doesn’t account for Sundial announcing its debt-free status just days ago.

I also wonder whether the pessimism betrays more than a hint of bias. The pundits have protested the forecasted 20% revenue jump in 2021 doesn’t match the 52% historical growth rate. Ah, gotcha. The technical investment term for this is “Yelling-at-the-Sprinter-Who-Just-Survived-Successful-Leg-Surgery-Because-He-Can’t-Get-Up-and-Run-Around-the-Hospital Syndrome.”

Here’s how I see it: A company that fights this hard to regroup and rejoin a vibrant sector deserves our attention. Not our money just yet, unless penny stocks are your turf. But let’s see where things sit six months from now, (hopefully) post-pandemic and (possibly) in a marijuana-legal America. Maybe these same analysts, as they so often do, will bend like hemp plants in the wind and salute SNDL stock.

Too bad we can’t jump ahead in time. All we know is that for now, Sundial has turned back its doomsday clock, and that’s a good thing.

On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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