Struggling Sundial Growers Is Not a Buy

Marijuana stocks remind me of a sparkler that gives off a few encouraging sparks and then goes dark. Thus far, Sundial Growers (NASDAQ:SNDL) is kind of like that. Investors in SNDL stock are left holding a sharp piece of unsparkly scrap.

image of marijuana leaf on top of several one-hundred dollar bills

Source: Shutterstock

Sundial is a company with diluted shares and weak fundamentals. It’s also a penny stock that is struggling to maintain its spot on the Nasdaq exchange.

SNDL Stock at a Glance

A few years back, the market was excited about marijuana stocks. Companies formed to take advantage of what was billed as great demand for marijuana products to be sold in mainstream markets. This premature enthusiasm was fueled in part by outright legalization in some areas, as well as reduced penalties and approval for some medical uses.

Canada, where marijuana laws were relaxed, spawned several new cannabis entrepreneurs. Calgary-based Sundial is one.

Sundial was founded in 2006 and went public in August 2019. The tagline in the Motley Fool says, “The marijuana and CBD producer had a rough introduction to the public markets.” The reason? Shares of SNDL stock lost 35% on their first day of trading.

SNDL stock debuted at $13 a share and raised about $143 million. However, shares ended the first day at $8.48.

“We fully expected volatility,” then CEO Torsten Kuenzlen said in an interview with Bloomberg. “We continue to expect volatility.”

Investors surely wish the company was able to sustain those prices. SNDL stock is currently trading around 68 cents per share. Over the last year, its price ranged from a paltry 14 cents to $3.88.

Working on the Balance Sheet

Officials of Sundial are working to improve the company’s balance sheet. It’s something they really had to do if they wanted to stay in business. One key step was the clearing of $227 million in debt. This was accomplished by selling more stock, swapping stock for debt and, of course, some cash.

Speaking of stock, my InvestorPlace colleague Faizan Farooque recently cataloged the dilution. “Total shares outstanding rose from 72.8 million in March 2019 to 206.7 million in September 2020, a rise of 183.93%,” he writes. “Operating loss over the same period has increased by 84.85%.”

The company also is taking other steps. These include switching its focus from being a wholesale provider to retail with higher-margin branded products.

Sundial’s performance in the third quarter showed that its effort may be a long journey. The company’s net loss was 71.4 million CAD, which was substantially more than the 32.8 million CAD loss that was recorded in the second quarter. Revenue in Q3 was 9.85 million CAD, which missed forecasts by about 7 million CAD.

The Delisting Threat

InvestorPlace contributor Todd Shriber provides a closer look at several stocks in danger of delisting, including SNDL. In the article, he points out that several cannabis stocks have been rallying but not Sundial. He describes the firm as “an overt laggard.”

The company got an early Christmas present last December. Nasdaq officials agreed to give Sundial another 180 days to meet requirements to remain on the exchange. To accomplish this, SNDL stock must close above $1 per share for 10 consecutive sessions by June 26, 2021.

A reverse split looms on the horizon.

The Bottom Line

Sundial Growers has been the poster child of troubled marijuana stocks for several months. The Canadian company has stayed afloat by going to the capital well often and diluting its stock in the process.

On the bright side, if one can call it that, the company is shoring up its balance sheet. Debt has been cleared. And Sundial executives are steering operations from an emphasis on wholesale to retail and branded products. The goal of this shift is to increase profits. That’s a good goal for a money-losing company to embrace.

Are the company’s actions too little too late? Time will tell. But investors would be wise to avoid the stock until its picture is clearer.

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

Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C. 

Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.

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