Let Sundial Growers Come Back to Earth Before Buying the Turnaround

There’s a long-term case for Sundial Growers (NASDAQ:SNDL) stock. I know: I’ve made that case. Twice.

In late December, I highlighted the company’s turnaround potential. A month later, even with a nice rally, I reiterated the case. In a passage that’s rather amusing in retrospect, I wrote, “I still like the stock here, albeit with a bit more caution.”

Marijuana plants growing in a greenhouse.
Source: Shutterstock

The reason that passage is amusing is because investors promptly threw all caution to the wind. That day, SNDL stock gained 7.3%. The following session saw a 37% rally. After a one-session pause, SNDL added 48% more.

The catalyst appears to be the same r/WallStreetBets crowd now famous (or infamous) for initiating the squeeze at GameStop (NYSE:GME). But, in fact, WSB wasn’t done. SNDL actually hit its stride on Reddit last week. Another 100%-plus rally followed, including a massive 79% gain on Feb. 10. Incredibly, on both that day and the day after, Sundial stock traded over 2 billion shares.

Even with a recent decline, SNDL stock still trades above $2. And while I like the long-term case, the fact remains that the short-term price is far too high.

There Is No Short Squeeze

I know that the narrative about WSB is that they are fighting for justice against evil, short-selling hedge funds. But that narrative was flawed to begin with — and at this point has essentially zero validity.

Yes, a few hedge funds took big losses in the early days of the GameStop squeeze. But at this point, professional investors see these rallies coming. They’re just as often jumping on board, as with the hedge fund that made $700 million off its long position in GameStop.

For SNDL, meanwhile, there isn’t even that much to squeeze. About 16% of the float is shorted at the moment. At Jan. 29 (the last reporting date), short interest was just one-seventh of average daily volume. Short squeezes often are as much about supply as price (as with the famous Volkswagen (OTCMKTS:VWAGY) corner in 2008).

There is no issue with supply of SNDL stock. None.

There’s not even big losses to be had. Bear in mind that with SNDL stock at 56 cents on Jan. 26, short interest in dollars totaled something like $40 million at most.

What we have seen, perhaps, is a “gamma squeeze.” In a gamma squeeze, market makers in the options market hedge their positions in the equity market. When call options are bought, they buy a portion of the underlying stock. As those call options rise in value, market makers buy more stock to increase their hedges.

It seems like it was a gamma squeeze that led to the parabolic rally in AMC Entertainment (NYSE:AMC). It’s possible similar mechanics are at play with SNDL, though the put/call balance suggests otherwise. (It takes heavy, heavy call buying relative to puts to really put the gamma squeeze into high gear.)

Regardless, AMC has plunged. GME has plunged. SNDL already is pulling back, and it’s going to keep falling.

No News for SNDL Stock

The problem is simple: there’s no reason for Sundial Growers to have a market capitalization above $3 billion, as is the case with the stock at $2.

Again, that’s coming from someone who’s been bullish on the stock. But SNDL stock has significant risk. Shareholder dilution continues, with Sundial selling units of stock and warrants just two weeks ago at $1 per unit. The company remains unprofitable. Growth is relatively muted. Competition is stiff.

There’s simply a lot of work left to do for Sundial. As for the supposed catalyst of U.S. federal legalization for Canadian cannabis companies, I remain skeptical.

Even if that opportunity arrives, Sundial is simply trying to get its balance sheet in order and get to some level of profitability, if on a heavily adjusted basis. The company doesn’t have the resources to enter the U.S. any time soon regardless.

Rather, it seems like SNDL stock is benefiting from the confluence of WSB and a broader rally in cannabis stocks. But it’s a rally that’s gotten ridiculous, as seen elsewhere in the sector.

Tilray (NASDAQ:TLRY) and Aphria (NASDAQ:APHA) are combining in an all-stock merger. Likely in part due to arbitrageurs playing that merger, TLRY stock saw a jump in short interest at year end. WSB saw the spike, and jumped on TLRY.

The gains in TLRY wound up doubling those of APHA — even though both stocks now promise eventual ownership in the same company.

That’s the kind of illogical trading we’re seeing in pot stocks at the moment. Even bulls have to agree that SNDL stock at this point doesn’t look much different.

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


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