Why Sundial Is a Buy Despite the Artificial Rally

Shares of pot company Sundial Growers (NASDAQ: SNDL) have been on a roll since the United States election period of November 2020. The recovery from an otherwise dismal 2020 started on the back of the optimism around the election. A strong retail investor activity on SNDL stock, part of a larger push by a Reddit community to force hedge funds into a short squeeze, then followed.

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That the ongoing rally has very little to do with any fundamental changes to Sundial’s business may lead many to relegate SNDL stock to a list of pump and dump plays – and rightly so. However, you’ll find that there’s potential value if you look deeper.

Here are the top three reasons to monitor SNDL stock.

U.S. Legalization Would Benefit SNDL Stock

Despite an increasing number of states in the U.S. regulating the use of pot to some extent, it remains illegal to use and possess cannabis under federal law.

However, with a Democratic president now in the White House and the Congress controlled by Democrats, there is a heightened sense of optimism that the days of cannabis being a schedule 1 drug are numbered.

President Joe Biden, during his campaign, promised that he would bring about a federal marijuana reform, which should see drop decriminalized at the minimum.

More recently, Democratic senate leaders have been talking about their plans to legalize the use of cannabis at the federal level.

On Feb. 1, Sen. Cory Booker, Majority Leader Chuck Schumer and Senate Finance Committee chairman Ron Wyden released a joint statement regarding their move to legalize cannabis:

“We are committed to working together to put forward and advance comprehensive cannabis reform legislation that will not only turn the page on this sad chapter in American history but also undo the devastating consequences of these discriminatory policies,” they wrote. “The Senate will make consideration of these reforms a priority.”

For a while, the feeling around marijuana legalization has been a matter of when rather than if. The statement from the Democratic senators only adds to the optimism that legalization is closer than ever.

It’s now left for investors to pick the potential winners. SNDL stock is one of those.

SNDL’s Attractive Valuation

If cannabis as a legal business is going to work out – both in the U.S. and internationally – SNDL stock is a growth play with one of the best valuations in the market. Here’s how Sundial’s sales ratio compares to leaders in the space. For the record, I’m focusing on the sales ratio because most cannabis companies are yet to reach profitability. Also, lower multiples are favorable.

Company (stock ticker) Price-to-Sale (PS) Ratio
Sundial Growers (SNDL) 1.70
Cresco Labs (CRLBF) 7.30
GrowGeneration (GRWG) 14.86
Curaleaf Holdings (CURLF) 17.50

Brief interpretation of the P/S ratio: for every $1 in SNDL sales, investors are currently paying $1.70 to own part of the company. Obviously, you want to pay as low as possible. That makes the competitors costlier.

I should mention that the lower P/S ratio for SNDL stock versus competitors could mean that investors aren’t very optimistic about Sundial’s future sales.

Still, I find the sales ratio for SNDL stock too attractive to ignore.

Strategic Alternatives Review

In its last earnings release, on November 11, Sundial said it was reviewing “potential strategic alternatives” to ensure that it explores all opportunities to maximize value.

Strategic alternatives reviews usually mean that a company is exploring the options it can employ towards achieving its goals and objectives (to increase sales and market share, for instance).

So far, we’re seeing the results of the review in the form of debt restructuring and potential M&A activity.

First, the management team at Sundial has taken advantage of the recent rally to clear its debt. The company announced in December that it is debt-free, having employed “a combination of asset sales, debt for equity swaps, capital raises, and cash repayments.”

So far in 2020, the company has continued issuing stock to raise further capital, which the company can use to finance acquisitions or other expansion initiatives. Within the last week closed $100 million from a secondary offering, which brings the company’s cash position to roughly $615 million.

Analysts typically frown against new stock issuance because, in theory, it dilutes the value of the shares owned by existing shareholders. However, I believe that Sundial’s moves put the company in a position of strength — as a potential acquirer or acquiree.

First, a debt-free position makes Sundial an attractive acquisition target to larger companies in the space.

Second, the improved cash position means that has more money to invest in growth initiatives — including acquisitions, which is the fastest way to grow sales in the marijuana industry. There are no indications as to which company Sundial could acquire. But with cash being a major issue for cannabis companies, there are surely many potentials out there.

Conclusion on Sundial Growers Stock

Investing in marijuana stocks, including SNDL stock, comes with a higher risk than investing in stocks in established industries. However, with the increased risk comes high upside potential — as I explained earlier.

However, you’ll need to be long-term focused to invest in SNDL. The ongoing attack on Wall Street by the subreddit community WallStreetBets will continue to make the stock volatile. So if you can’t stomach high volatility, and you’ve yet to buy SNDL stock, you’ll want to put it on your watch list for when the dust settles. For me, though, the company looks like a bargain at current prices.

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

Article printed from InvestorPlace Media, https://investorplace.com/2021/02/sndl-stock-why-sundial-is-a-buy-despite-the-artificial-rally/.

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