On April 5, This ‘X’ Pattern Changes Everything

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Wed, April 5 at 4:00PM ET

Sundial Growers May Rebound, but It’s Likely to Fall a Lot Further First

Is the party over for Sundial Growers (NASDAQ:SNDL) stock? The Canada-based cannabis company was one of the biggest winners during the “meme stock madness” we saw this winter, but Reddit traders have made their exit. Its “meme stock” status alone isn’t enough to give it another boost.

SNDL stock
Source: Shutterstock

Of course, there is one factor still at play: the U.S. legalization catalyst. I recently made the case why this could help fuel one last big rally for Sundial. This catalyst could help fuel future outsized moves, but while it’s possible, it may take a while.

With the more pro-pot Democratic party holding both the White House and U.S. Congress, legalization is more likely now than it’s been in recent years. However, President Biden put the issue on the back burner.

It’s still a long road ahead until we see commercial marijuana sales become a fully legal, regulated business on the federal level.

Outside of legalization, there’s little to be excited about with regards to this also-ran pot stock. Valuation is completely out of sync with its fundamentals. Its large cash position, the result of heavy dilution, will likely soften the blow. But, with the high likelihood that it continues to trend lower, take your time before buying.

Not Much Help for SNDL Stock Right Now

The meme stock trend has long since peaked. U.S. legalization? Probably going to take longer than previously anticipated. So, what’s going to drive interest once again in Sundial? That’s the issue. Outside of these factors, there’s little else in play to help move the stock back above $1 per share.

Its most recent quarterly results, released on March 17, weren’t exactly anything to write home about. Top line results fell short of analyst expectations.

For the past year, Sundial has made a big shift away from wholesale cannabis toward higher-margin branded products. While this pivot towards profitability is a step in the right direction, isn’t happening fast enough to justify the stock’s current valuation.

Even after falling more than 75% off its highs, SNDL stock remains overvalued. At today’s prices, it sports a forward price-to-sales ratio of 29.8x. For comparison, that’s a higher valuation than a much better-positioned rival, Canopy Growth (NASDAQ:CGC), which currently trades for a price-to-sales ratio of 25.3x.

As I’ve said previously, much of this valuation discrepancy has to do with Sundial’s shareholder dilution over the past six months.

Although the stock’s declined, investors have yet to fully account for this splitting of the pie into many more slices. On the flip side, this dilution now gives Sundial a war chest of about $574 million. There likely are enough tangible assets in its possession to avoid shares from falling back to their 52-week low (14 cents per share).

Downside risk may be limited. Yet, another double-digit percentage decline could be just around the corner. Why buy now, when lower prices are all but inevitable?

A Better Entry Point

Previously, I’ve called Sundial a “legalization lottery ticket.” That is, the stock was very risky with the potential to produce double-digit percentage losses, but compare that to the possible triple-digit percentage gains that could occur on legalization progress. Potential outsized gains vastly exceed potential outsized losses.

Is this still the case? To some extent, yes. With its large cash position and zero debt, there’s little risk of a total loss.

The debate within the Democratic party about pot reforms may be delaying things, but major changes may still happen within the next year or two. News of this could send SNDL back toward its recent highs of $3.96 per share.

In short, risk/return could still be in your favor. Yet, patient investors may be able to enter a position at a more favorable price.

As InvestorPlace’s Mark Hake wrote, Sundial’s getting ready to overdose on share dilution. Sundial is planning to raise another $800 million via a share offering, so expect further downside pressure on the stock in the meantime.

I don’t see shares falling back to their lows, but a move back to where shares traded before the February madness (around 60 cents per share) seems reasonable.

Take Your Time Before Rolling the Dice

With underwhelming results, a rich valuation, fading interest from Reddit traders and the upcoming dilution, don’t expect another rally anytime soon. That said, it may still be a worthwhile legalization play for patient investors willing to take risky positions.

Again, though, if the shares fall back to 60 cents per share (which is likely) it’s not worth buying in today. If you want to take a gamble with SNDL stock, take your time. Wait for the markets to fully absorb its past and upcoming dilution.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

Article printed from InvestorPlace Media, https://investorplace.com/2021/04/sndl-stock-further-to-fall-before-rebound/.

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