I’ve written about Sundial Growers (NASDAQ:SNDL) stock in the past and how I thought it was an asymmetric risk-to-reward trade.
Sundial stock could easily double from these levels if the company is successful in its restructuring efforts. Furthermore, the stock is beaten down enough that the valuation is actually compelling.
SNDL stock actually had a brief rally in late May/early June. The stock shot up from 70 cents to a high of $1.40. Now it’s back to around 60 cents.
Granted, SNDL stock looks weak from a technical analysis viewpoint. However, I am keeping my eye on the company as I believe that there are exciting developments happening just below the surface.
Sundial Continues Its Restructuring
Sundial recently released its Q2 2021 financials and the results were decent enough. Both revenue and earnings were close enough to what analysts were expecting. These headline numbers weren’t enough were not enough to inject life into SNDL stock, though.
The company’s gross cannabis revenue saw an increase of 8% in the quarter ending at $12.7 million. However, the bigger takeaway is Sundial’s rapidly expanding investment and fee income relating to its portfolio activities. Combined investment, fee, and equity portion revenue for was $9.4 million for the quarter.
The company’s net loss slightly improved at -$52.3 million compared to a -$60.4 million loss the same time last year. However, underneath this headline number, Sundial’s results are more encouraging. The company took out a non-cash provision for one of its facilities. This one-time expense reduced income by $60 million. Taking this out, Sundial is actually net profitable for the quarter.
The company also had a much smaller EBITDA loss this quarter of -$200,000 compared to the -$3.9 million the same time last year.
The Investment Business is Gaining Steam
The second leg of the company’s business strategy is its investment operations. The company does this through Sunstream Bancorp it’s 50/50 joint venture with the SAF Group. Sundial deploys capital targeting financial opportunities within the cannabis sector. These opportunities could be in debt or equity securities.
The U.S. House of Representatives also recently passed a bill giving marijuana businesses easier access to the financial system. This could open up a whole host of investment opportunities in the U.S. for Sunstream. In the past, cannabis businesses could not have bank accounts and had to rely on cash and small credit unions. But now with access to the financial system, these marijuana businesses are able to transact much easier with companies like Sunstream.
So far Sundial, primarily through its Sunstream subsidiary, has been successful in deploying its capital toward businesses with favorable risk-adjusted returns. The company deployed $253 million in cannabis-related loans and investments as of June 2021. This resulted in a market-beating annualized rate of return of about 13%, well above bond yields.
The company has a total capital base of liquid assets and cash of more than $1.2 billion. This means that Sundial still has plenty of “firepower” to close new lucrative deals in the near future. Furthermore, this 13% rate of return was achieved without the use of leverage as the company has no debt. Therefore employing leverage could see the rate of returns rise as high as 20% to 25%.
Investor Takeaway on SNDL Stock
SNDL stock remains a highly speculative play, not for the faint of heart. The cannabis industry, especially in Canada, is undergoing a tumultuous period. Sundial has been a victim of this turmoil in the past having gone through restructuring in 2020.
But Sundial has emerged as a stronger company. The company’s two-pillar strategy of cannabis operations and investments seems very promising. Speculative investors should consider SNDL stock.
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On the date of publication, Joseph Nograles 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.