Cannabis is a hot market, essentially representing the mathematical impossibility of turning zero into a non-zero number. What I mean is that a black market has turned into a legitimate, taxable one. Further, with greater support for legalization, the narrative appears brilliant for Sundial Growers (NASDAQ:SNDL). So, why isn’t SNDL stock moving higher?
In fact, after a brilliant start to the year, Sundial Growers has gradually lost support from its ardent fans. Don’t get me wrong — SNDL stock is technically one of the strongest year-to-date performers, up 54%. But since its closing peak of $2.95 on Feb. 10, shares are down a staggering 71%.
Ironically, here on April 20 — or “420” in pot parlance — SNDL is now a literal penny stock at 94 cents.
Naturally, this has many folks worried about holding the bag. You see, the law of small numbers works stunningly when you’re on the long side of a bullish rally. But the opposite is also true — individual sessions could see you lose double-digit percentage points.
Doubling Down on Optimism
Our own David Moadel doesn’t appear to be perturbed by the volatility, insisting that he’s going to double down on his optimism. As he put it, “If the stock was good at nearly $4, it should be terrific around $1. Could I be wrong about that? Of course, but the risk-to-reward profile seems even better now.”
At the risk of ruffling feathers, I have a different opinion, but let’s examine his reasoning first. One of his main arguments is that SNDL stock could benefit from the underlying company slashing its debt and reducing expenditures. Moadel noted that in 2020, “the company eliminated $227 million in its aggregate principal amount of debt.”
Further, by reducing the size of its workforce, Sundial Growers is theoretically a leaner and more efficient operator. Additionally, management firmed up its capital position for the long term.
Read Between the Lines
On paper, there doesn’t seem to be anything wrong with cutting debt and expenses. I mean, that’s what every personal financial guru tells us. So, why should it be any different for SNDL stock?
Primarily, the difference is that regular people are people, they’re not businesses. Further, cutting debt and expenses are deflationary actions. Deflation is the opposite of growth. SNDL stock is a growth play. Look, the company even has the word growers in its name!
The point is, investors should look beyond the headline print and read between the lines. First, cost cutting sounds good in principle until you filter out the reason why such a move is necessary. According to Sundial Growers CEO Zach George, the company “curtailed production and reduced the size of our workforce in response to market demand.”
In response to market demand? That tells me that management has little confidence that the cannabis sector as it stands will support the original growth-oriented objective of Sundial. Instead, the firm must scale down, which is the opposite narrative fueling growth stocks.
Second, the idea of cutting debt to zero as of the balance sheet of the quarter ended Dec. 31, 2020 is a curious one. Again, I understand if you were talking about individuals cutting out debt. But for a growth firm seeking to take market share from its competitors? The scaling back on debt is another signal of little to no confidence regarding the viability of the cannabis industry.
Plus, look at the benchmark interest rate. Sure, it’s ticked up higher due in part to growing optimism regarding a broader economic recovery. But the rates are still dirt cheap relative to prior years. Thus, for a business – especially a growth-oriented business – it’s the perfect time to leverage the cheap money environment.
Sundial not taking this clear monetary opportunity is an uncomfortable sign for SNDL stock.
SNDL is a Falling Knife
Back early last month, I warned that SNDL stock is technically overdue for a correction. I’m not going to toot my own horn and say that I was right. Instead, this was merely an exercise in seeing the obvious — so long as you were objective about what the market was telling us.
If you look at the chart that I posted in that article, you can clearly tell that at $1.30, SNDL stock was testing the support line of a rising bullish channel. Unless some catalyst arrived — we weren’t going to get it from the financials — Sundial shares risked falling out of the channel.
That’s exactly what happened. SNDL badly needed a social media boost and it didn’t get one. With the bears now in control, Sundial has become a falling knife. You might be able to secure a discount as the masses rush back into SNDL. But chances are, you’re going to end up hurting your portfolio.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.