Dump Sundial Growers Stock in Favor of Buying Retail Pure-Play Nova Cannabis

In early May, Sundial Growers (NASDAQ:SNDL) announced that it would pay $106.3 million in cash and SNDL stock to acquire Inner Spirit Holdings (OTCMKTS:INSHF).

marijuana stocks Hand gently holding rich soil for his marijuana plants
Source: Jetacom Autofocus / Shutterstock.com

The Spiritleaf retail network is a collection of 86 franchised and corporate-owned stores in five Canadian provinces. 

The shareholders of Inner Spirit will receive $0.24 for each share held along with 0.0835 shares of Sundial.

The offer is a 55% premium to its 10-day volume-weighted share price and a 63% premium to its May 4 closing share price.

The move puts Sundial in a position to vertically integrate its business model. Despite this positive, in early June, I argued that speculative investors were better off investing in Indiva Ltd. (OTCMKTS:NDVAF), a leading Canadian edibles manufacturer. 

Called to discuss Sundial once more, I’m inclined to consider another Canadian, publicly-traded cannabis retailer as a possible alternative. 

May the best pot store win!

Should You Buy the Spinoff or the Parent?

The cannabis retailer in question is Value Buds, a provider of low-cost, high-value recreational cannabis products sold from 18 stores in Alberta and Ontario, with another 30 on the way in 2021. By 2023, it aims to have more than 200 locations open coast-to-coast. 

In January, Alcanna Inc. (OTCMKTS:LQSIF), a retailer of alcohol and cannabis in Western Canada, agreed to spin out its cannabis operations and merge them with YSS Corp., a cannabis retailer with 19 stores in Alberta and Saskatchewan and five in development.

By the end of the third quarter, all stores should be operating under the Value Buds discount banner. 

The new name of the merged entities is Nova Cannabis (OTCMKTS:NVACF). Alcanna owns 63% of its stock and is required not to sell any shares for 24 months. 

In Alberta, where four of Alcanna’s stores were converted to its Value Buds discount banner, sales increased by more than 250%.

Although only 21% of Canadian consumers buy low-priced weed, it accounts for 70% or more of the volume sold in a year. 

This means whatever it loses in revenue from lower prices, it more than gets back in increased volume. In the beginning, its goal is to grab market share.

Once it does that, it will grow its margins from private label product sales.

Running Nova Cannabis is Darren Karasiuk, an Alcanna board member and former Chief Commerical Officer of Aurora Cannabis (NASDAQ:ACB). 

If it were me, I’d probably go with the pure-play cannabis retailer. In any event, Alcanna will most likely unload more of its stake as the share price moves higher, reinvesting any proceeds in its liquor stores.

Spiritleaf and SNDL Stock

According to pg. 12 of an April 2021 presentation by Kiaro Holdings — a Canadian cannabis retailer in British Columbia and Saskatchewan — Nova’s stores generate $308,400 per location compared to $503,170 for the average Spiritleaf store. 

So, from that perspective, SNDL seems to have an advantage over Nova.

As I stated in my last article about Sundial, Spiritleaf had system-wide sales in 2020 of $85.6 million, up 258% from a year earlier. By the time it opens the 27 pending, it will have a network of 116 stores, more than double Nova’s footprint.

While I continue to be intrigued by Sundial, I really like the pure-play, value angle that Nova brings to the table with Value Buds.

It reminds me of Tomavo, a fruit and vegetable chain that’s expanding in Atlantic Canada. Very bright, well-managed, with excellent customer service, and most importantly, excellent products at reasonable prices.

The Bottom Line on SNDL Stock

Let’s not forget I’m already on record choosing High Tide (OTCMKTS:HITID) — another Calgary-based cannabis retailer with 85 locations across Canada — over Sundial in early May. 

So, perhaps, the better question isn’t whether I should choose Nova over Sundial but whether I should choose Nova over High Tide. 

That’s a question for another day. For now, I’d go with Nova if retail is your cannabis thing.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2021/06/sndl-stock-in-favor-of-buying-retail-pure-play-nova-cannabis/.

©2021 InvestorPlace Media, LLC