We’ve seen several new investing strategies appear in the last year. However, the emergence of the WallStreetBets forum on Reddit as a tour de force is the most interesting trend to emerge in a while. Sundial (NASDAQ:SNDL) stock is a net beneficiary.
Shares of the Canadian cannabis heavy hitter have a 52-week low of 14 cents per share and a 52-week high of $3.96 apiece. That kind of oscillation is not surprising. Reddit users squeezed out hedge fund managers from their positions on GameStop (NYSE:GME) and are now looking for other highly shorted stocks to invest in.
For its part, Sundial has issued an astounding number of shares to take advantage of its skyrocketing stock price. It now has roughly 1.56 billion common shares outstanding, up from 103.1 million in September 2019. Meanwhile, net cannabis revenue fell 36% sequentially in the third fiscal quarter of 2020. And net loss widened to 71.4 million CAD from a net loss of 32.8 million CAD for the three months ended June 30, 2020. On the bright side, the company has used the proceeds of its equity raises to extinguish its outstanding debt, opportunistically cleaning up its balance sheet.
However, I am skeptical of rewarding any company that is trading less based on fundamentals and more on speculation. For long-term stockholders, this is the ideal time to book your profits and exit your positions.
SNDL Stock Survives to Fight Another Day
Sundial shares are up 223.1% year-to-date. The astounding rally has resurrected the company from the depths of near bankruptcy. It has raised $800 million of cash from the public markets. Some of the notable capital raises include a US$100 million equity offering and a unit offering of US$74.5 million.
That has diluted existing shareholding immensely. However, it has led to a cash-rich position that has helped clean up its debt-laden balance sheet. Furthermore, Sundial also has the capital to undertake mergers and acquisitions. Canada has a lot of cannabis licensed producers. Most of them are under an incredible amount of stress, making them ideal merger targets.
Hence, it comes as no surprise that the company closed an investment of 59 million CAD in the senior secured debt of Zenabis. That leaves the company with $670 million in cash that it can use to acquire further distressed assets in the U.S. and Canada. For now, the company’s focus is squarely on Canada. However, now that it has a sizeable war chest, it can diversify its operations geographically, particularly in the U.S., which remains the golden goose in the cannabis industry.
But if we back up a bit and focus on the fundamentals, you see a company in trouble. According to Stock Rover data, the company has reported negative earnings surprises in the last five quarters. In essence, you have a company that has not done well financially but has done well in the markets. Never a recipe for long-term success.
The incredible rise in share price within a short period of time means that Sundial is now in the company of industry leaders Canopy Growth (NASDAQ:CGC) and Cronos (NASDAQ:CRON) in terms of market cap. However, there is at least some justification for the other two companies to trade at a premium. CGC has grown sales 93.4% in the last three years. Cronos has had a sales growth rate of 128.5% during the same period.
Having said that, I am not saying that they are not overvalued. Due to the election of Joe Biden, investors are betting up cannabis stocks in the hopes of federal legalization. That leads to some astronomical valuations in the space, which have nothing to do with fundamental strength.
SNDL stock trades 45.04 times forward enterprise value-to-sales while CGC and CRON trade at 31.49 times and 72 times, respectively. No surprises that all three of these stocks have a bearish outlook as well. Honing in on SNDL stock, Refinitiv has a consensus 12-month price target of 38 Candian cents from four analysts tracked. It implies an 80.3% drop from its current price. None of the analysts have a bullish rating on the stock.
In summary, the cannabis producer has repaid its outstanding secured debt and regained Nasdaq minimum bid price compliance. Even after extinguishing its debt, the company has a lot of capital to purchase distressed LPs.
Nevertheless, its miraculous recovery is down to the short squeeze among highly shorted stocks caused by overenthusiastic retail traders. Since it has little to do with its own performance and prospects, SNDL stock remains a risky proposition.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.