What goes up must come down. Well, at least that seems true for Sundial Growers (NASDAQ:SNDL). With its recent high times up in smoke, is now a smart time to buy SNDL stock?
Let’s look at what’s been happening off and on the price chart in Sundial, then offer a risk-adjusted determination that won’t burn investors.
When it comes to many stocks and hyped-up themes, it’s easy to say “what were they smoking” in hindsight.
The special-purpose acquisition company (SPAC) market in 2021 is full of such gems. For example, Churchill Capital (NYSE:CCIV), ChargePoint Holdings (NYSE:CHPT) or Virgin Galactic (NYSE:SPCE), to name a few.
The same is true when it comes to infamous short-squeeze trades. Think GameStop (NYSE:GME) and AMC (NYSE:AMC). Or crypto miners Riot Blockchain (NASDAQ:RIOT) and Marathon Patent (NASDAQ:MARA). All of these got buried in recent weeks.
Amid higher interest rates and inflation fears, investors can also count marijuana stocks in that large crop of withered and more speculative stock tickers. And SNDL stock is no exception to this.
Since hitting a relative peak of $3.96 on Feb. 8, shares of SNDL have cratered to about 86 cents. Sundial’s correction of nearly 80% has proven a bit more volatile in its bearish wherewithal than peers Aurora Cannabis (NYSE:ACB), Canopy Growth (NASDAQ:CGC) and Aphria (NASDAQ:APHA) whose shares have declined by roughly 55% to 60%.
But that’s not exactly a surprise either.
At just under $1.5 billion, SNDL stock is the smallest cannabis play of the lot. In risk-off environments, being smaller isn’t the same as being nimble. Moreover, as with its peers, Sundial Growers remains mired in red ink and profitability is nowhere in sight. But the company has a few other drags too.
One place where Sundial does rank as the biggest isn’t beneficial to cannabis stocks. Today, SNDL’s enterprise value stands at a fairly hefty multiple of 23x revenues. That’s well above its larger competition. The next closest is the cannabis group’s largest outfit, CGC, whose EV-to-sales comes in at 19x.
Another strike against Sundial and its relative weakness the past couple months is the stock itself.
SNDL’s recent high began its journey off an all-time-low of 14 cents in 2020’s fourth quarter. Moreover, the extreme run-up of more than 2,750% at its February high was fueled in part by Reddit and Robinhood traders aggressively driving up more speculative stocks for staggering but short-lived gains.
Sowing Sundial Growers’ Seeds of Growth
As inferred, SNDL is certainly not an investment grade blue-chip. And today its chances of being the next Apple (NASDAQ:AAPL) or Home Depot (NYSE:HD) within a riskier cannabis market are speculative at best. Still, some strategic movement this year does hold promise of better days to come.
Stock sales by management which took advantage of SNDL’s rally this year have put the company in a solid cash position. Not only are prior ongoing business concerns cleaned up, but unrestricted cash of around $575 million allows the cannabis outfit to stay on track as it pivots from wholesale into retail branded operations.
Today there’s also potential flexibility for Sundial to buy growth and further improve its financial position through an acquisition, or even a couple, if the right opportunity presents itself. But is this a realistic expectation for SNDL stock?
SNDL Stock: The Weekly Price Chart
Source: Charts by TradingView
I wouldn’t say it’s time to let bygones be bygones as far as a purchase of Sundial Growers is concerned. That type of ability where investors pick up the pieces as it relates to buying a stock on weakness is appropriate for AAPL and other blue-chips, but not a stock of SNDL’s caliber. Near-term cash aside, its long-term survivability, or even a thriving enterprise, are far from guaranteed.
For the foreseeable future, allocating investment monies towards SNDL stock falls within that portion of your portfolio deemed “risk capital.” Still, conditions for this type of purchase are looking the best they have from a technical standpoint in quiet some time. However, respecting the price chart no matter the outcome on future purchases is paramount.
As the weekly chart for SNDL stock reveals, shares are in a testing position of trendline support. Along with an oversold stochastics on the cusp of a bullish crossover, a promising play is to buy into the rally above last week’s high of $1.03. This would act to reaffirm the pivot low in anticipation of a new uptrend that’s currently developing.
I’d recommend any stock purchases in Sundial maintain an initial stop-loss beneath the pattern low. With the potential bottom occurring just beneath SNDL’s 76% retracement level, a failure increases the likelihood for shares to retreat toward last fall’s all-time-low. However, if shares begin to find a more meaningful bid, taking partial profits near $2 looks like smart business relative to the accepted risk.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.