Sundial has provided some decent short-term returns for a few aggressive retail traders. However, I believe that investors who hold onto Sundial will ultimately experience a ton of pain in the long-term.
The cannabis sector is full of growth potential and wide-eyed millennial investors eager to make a quick buck. And there are some great, high-quality growth names in this sector to choose from. However, in my view, Sundial is on the bottom of the list when it comes to long-term options for investors right now.
Here are two reasons why I think investors should be very wary of what I view as the “meme trap” of SNDL stock right now.
Sundial Stock Is Trading Way Above the Company’s Fundamentals
Like it or not, equities trade (or are supposed to trade) in-line with companies’ cumulative discounted future free cash flows.
Accordingly, investors make many educated guesses, or projections, about companies’ future growth rates, profit margins, capital expenditures, cost of capital, and other key inputs. Plugging these values into financial models produces price targets for stocks.
It’s impossible to model a scenario today in which SNDL stock is worth what the market says it is. After modeling Sundial’s future cash flows, I have arrived at a price target that is significantly lower than the 98 cents price at which Sundial was trading early today.
Stocks are traded at incorrect prices all of the time. However, the increase in the number of retail investors speculating, through social media, on which meme stock can “go to the moon” has changed the game. Speculation that’s based on feelings is about as far away from traditional fundamental stock analysis as investors can get. And it’s a dangerous game to play.
Indeed, investors who buy stocks based on what’s trending on Reddit have done quite well recently. When retail investors band together to boost stocks, they can move higher in the short-term.
However, over the long-run, these rallies will fade. If the laws of finance still apply, that will be the case. Accordingly, I’d recommend that retail investors download a free DCF valuation model and play around with the numbers themselves. They’ll see what I mean. Sundial wasn’t worth $4 in February, and it’s not worth 98 cents now.
Sundial’s Lack of U.S. Exposure Is a Big Deal
I’ve harped on this point in the past, but I think it’s worth repeating: Sundial is not a U.S. multi-state operator. It’s a tiny Canadian company with a pretty terrible track record when it comes to international expansion.
The U.S. is where I see the lion’s share of cannabis growth coming from in the years and decades to come. I think the Canadian cannabis space has been overhyped since its 2018 surge, and I don’t think investors should consider entering it right now.
Some investors may believe that, since Sundial has raised a great deal of cash from issuing hundreds of millions of its shares recently, the company can make acquisitions. And that is true.
However, I think Sundial’s existing business model is not working. To believe that growing a struggling business into a larger struggling business will help shareholders is ridiculous, in my view.
Sundial has been able to shore up its balance sheet and meet Nasdaq’s listing requirements due to the recent increase in its stock price. However, now that SNDL stock is below $1 again, there are concerns that another reverse split may be required. As a result, investors should keep an eye on this issue.
The 30,000 foot view of this stock isn’t good right now. I think Sundial is a growth trap that investors should avoid. Indeed, SNDL stock remains overvalued, and it lacks any sort of real growth potential. Consequently, investors should avoid Sundial at this point.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.