The hysteria surrounding cannabis stocks has resulted in quite the rollercoaster for investors in Sundial Growers (NASDAQ:SNDL) and SNDL stock.
Of course, following the bearish Feb. 8 article I wrote on SNDL stock, shares more than tripled in a few days. However, since then, shares have settled down to approximately the same levels as a month ago.
So what’s changed?
Well, really, not much. I’m still outright bearish on this stock, and am happy to explain why.
Valuation Concerns Abundant for SNDL Stock
Investors can gobble up shares of SNDL stock for a “measly” 40-times sales, or 5-times book. In this hyper-inflated market, I guess that’s cheap. Let’s take a look at the company’s major Canadian peers in this space for reference points (numbers are MRQ, not TTM):
- Canopy Growth (NASDAQ:CGC): 31-times sales, 3.9-times book
- Aurora Cannabis (NYSE:ACB): 6.5-times sales, 1.1-times book
- Cronos Group (NASDAQ:CRON): 77-times sales, 2.1-times book
- Hexo Corp. (NYSE:HEXO): 11-times sales, 1.9-times book
I excluded Aphria (NASDAQ:APHA) from this list, due to the pending merger with Tilray (NASDAQ:TLRY) and the complications this merger provides for the numbers.
Well, SNDL stock isn’t the cheapest car in the lot. It’s also not the most expensive. Indeed, the argument could be made that the market is pricing this stock correctly. When one considers the fact Sundial’s a relatively small producer with more upside, a higher valuation to its peers may make sense.
However, I think there’s two key items of concern to note with these valuations.
First, these Canadian producers are handcuffed due to listing requirements in the U.S., forced to play in their own back yard right now. Yes, these companies are engaging in some small, strategic moves to gain a foothold in the U.S. market. However, on the whole, these companies lack the meaningful U.S. exposure MSOs like Curaleaf (OTC:CURLF) provide investors right now. Concordantly, on a valuation basis compared to MSOs, all of these companies in the above list look expensive.
Second, it’s important to remember that buying a stock because all the cool kids are doing it isn’t real investing. The meme status of Sundial is undisputed right now. For a while, this was one of the hottest stocks on Reddit and Twitter, with a massive “moon shot” retail investor base.
Liquidity Concerns Alleviated for Now, but Questions Remain
Sundial’s management team has been getting busy. The company’s issued a ton of shares, taking advantage of its recent stock price spike to bolster the company’s balance sheet. Sundial’s convertible debt has been triggered as well, sending more shares into the open market.
This stock price surge has also allowed Sundial to regain its NASDAQ listing compliance.
Indeed, the net result has been positive for Sundial in the near-term. This is a company with a much cleaner balance sheet, and a war chest to work with.
However, the question remains: what to do with this cash? Sundial’s management team could dial up some acquisitions in the U.S. and aim for growth. Or, the company could shore up its existing operations and work on moving toward profitability. My view is Sundial’s only option is the former. This is a growth stock, and investors want to see growth at any cost. If that means sacrificing traditional M&A discipline, so be it.
So What’s a Cannabis Investor to Do?
I want to be clear – I’m not saying every Canadian cannabis producer isn’t worth a shot right now. There’s enough room in the U.S. market for global players from any country. Once regulations provide for cross-border trade, established Canadian players with tons of inventory and a domestic market that’s too small to justify existing production levels will be chomping at the bit for a piece of the pie. U.S.-Canada trade remains strong, and there’s a real reason to be optimistic here.
That said, Sundial is a turnaround play compared to its aforementioned peers. Yes, some financial concerns have been alleviated as a result of its recent stock surge. However, the dust hasn’t quite settled yet. I think investors buying this stock on a momentum basis alone could be left behind if risk-off sentiment takes hold in a bigger way.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
