Sundial Stock Isn’t Much More Attractive Even With Reduced Debt

Cannabis-based investments naturally garner much attention primarily because of a core reality. Very few other business categories can claim they were previously illicit enterprises. Therefore, the green plant is representative of a scientific and economic impossibility: turning nothing into something. Yet even when you factor in the sector’s enthusiasm, the bullishness toward Sundial Growers (NASDAQ: SNDL) stock seems unusually strong.

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

As you probably know, SNDL stock enjoys a strong following on social media, particularly on Reddit.

Indeed, the now-famous (or I suppose infamous if you’re a hedge fund manager in its crosshairs) subreddit r/WallStreetBets has a forum dedicated to SNDL. And while you might be quick to dismiss social media as a catalyst, it warrants our respect.

Not too long ago, r/WallStreetBets catapulted the concept of the meme stock — equity units that in part feature a cult-like following.

While I’m probably on the subreddit’s hate list, I’ve personally benefitted from the coordinated efforts to drive up heavily shorted assets. While I wouldn’t call the bearish activity against SNDL stock extremely unusual, many traders see it moving southbound.

At time of writing, SNDL stock had a short percentage of float of just under 14%. That’s not nothing. With collective buying activity, Sundial bulls could dial up the pressure on bearish traders. However, it’s not unusual bearishness. For instance, Canopy Growth (NASDAQ:CGC) has a short percentage of float of 17%.

So, what makes SNDL stock worth buying with gusto while CGC, not so much? According to the Sundial forum, part of the bullish thesis comes down to debt. Sundial doesn’t have any (well, technically it has $740,000 worth, which is a nothing-burger) while Canopy has a whopping $1.25 billion.

On paper, this suggests that Sundial has more financial options without diluting SNDL stock, which is net positive for the optimists. But this also raises important business questions.

(Lack of) Debt Isn’t the Only Story for SNDL Stock

Before you do anything with SNDL stock — whether as a bull or bear — you should realize its predominant theme. Look, you might have the greatest thesis on Sundial. However, if most traders disagree with you, you’ll probably end up losing money, at least in the near term.

Therefore, try to appreciate why SNDL stock is so appealing. Let’s say you’re a high school graduate and you don’t know much about the equities market. Suddenly, you come across a company which has no debt (practically speaking) but which hedge funds hate. Of course, you’d be tempted to bet against the hedgies — and by deduction, for SNDL — because debt is a terrible thing that you should eliminate.

From student loans to auto financing to home mortgages, these are liabilities that everybody strives to eliminate. But there’s a big difference between personal debt and corporate debt.

This sounds like something Robert Kiyosaki might say but he’s absolutely right when he talks about different rules or systems depending on the quadrant or category of economic contributor you are. In the business world, using debt can be advantageous, particularly if you see opportunities over the horizon.

Yes, it’s true that many if not most cannabis firms have sizable debt on their books. But it’s also fair to point out that these companies believe in their upside potential; hence, they eschewed clean balance sheets to maximize their opportunities. And you’d figure at least a handful of these companies will be correct in their thesis.

But Sundial? It’s going the opposite direction, eliminating debt from its books. That’s fine but the revenue trend, which has been declining since 2019, suggests management has a less-than-encouraging agenda regarding its liabilities. The executives might be preparing for lean years ahead. In that case, getting rid of debt is wise.

Not About Debt but Motive

I’ll share with you a personal story that is very relevant to my opinion on SNDL stock here. Thanks to my speculative activities with cryptocurrencies, I bought my house free and clear. Inevitably, my business-savvy friends told me I should refinance my mortgage instead because rates were so low and use the profitability to invest in real estate properties for cash-flow purposes.

It’s a great idea if you believe in the economic recovery. I don’t. I have zero confidence in the Biden administration or a possible second Trump administration to address the structural problems we have in this country. Even if Zeus came thundering down from above and declared his candidacy for POTUS, I’d still be skeptical.

Whether you agree or disagree is not the point. Rather, I felt uncomfortable with the economy and therefore, I eliminated debt from my life. In my opinion, it’s rare that astute businesspeople eliminate debt in a raging bull market.

Which then brings up the debt elimination question for SNDL stock. Why did Sundial clean up its liabilities? An investor thinking from a personal perspective might view this as a solid move. But if you’re a corporate enterprise, you can’t immediately arrive at that same conclusion.

On the date of publication, Josh Enomoto 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.

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.


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