Sundial Growers (NASDAQ:SNDL) has been on a wild ride over the past two months. Throughout the summer and early fall, SNDL stock had been staying quietly in the 60 – 70 cent range. In November, however, Sundial shot up from 60 cents to 90 cents virtually overnight.
Sundial’s big rally came on a pivot of the business model, upbeat earnings, and a newly-announced share repurchase program. It seemed like the tide had turned for Sundial. Since that November rally, however, things quickly went south. SNDL stock has slid from 90 cents to around 57 cents, losing all of its recent gains.
What explains the recent drop in Sundial given the seemingly improving fundamentals? A big piece of the puzzle is tax loss selling.
The Tax Loss Selling Effect
Toward the end of the year, investors like to optimize their tax situations for a given filing period. Particularly in big up years, people tend to have accumulated a lot of capital gains. One way to handle that potential tax bill is to sell positions in which a person has a large trading loss.
While Sundial shares are still up year-to-date, more recent buyers are now largely underwater. Sundial shares have declined 45% over the past six months, for example. Thus, for people that enjoyed big gains in other holdings in 2021, it could make sense to sell SNDL stock here and claim that tax loss.
Things then will go in reverse in January when assets tend to outperform. Researchers have deemed this the January effect. In particular, assets that performed poorly in one calendar year can jump once the artificial pressure from tax-related selling ends.
There seems to have been a ton of tax loss selling this year, both in Sundial and in many stocks that have struggled throughout 2021. The marijuana stocks as a whole keep hitting fresh lows despite seemingly positive news on the legalization front. And other sectors that have been under fire, such as speculative growth stocks and special purpose acquisition companies (SPACs), keep hitting new depths. These sorts of names have been pounded in November and the beating is continuing on into December.
It’s unfortunate that Sundial got caught up in this tax loss selling. Just prior to that, it appeared Sundial was starting to wake up from its recent slumber.
For one thing, on Nov. 11, Sundial announced a plan to repurchase up to 102.8 million shares of its stock over the next year. The plan went into effect on Nov. 19. At current prices, this would be around $60 million of stock if Sundial exercises the whole buyback authorization.
Some skeptics might question a buyback. After all, Sundial obtained the cash to do this by issuing stock last year. As the company isn’t generating profits yet, a buyback is simply returning capital that was raised via secondary offerings. However, I’d say that management added value by issuing stock when market demand was high and is now supporting the share price at a relative low point. This does boost returns somewhat for longer-term shareholders.
The repurchase news followed October’s big move of buying a liquor and cannabis retailing firm. This move is most interesting for Sundial. The liquor store business is already substantially cash flow positive, giving Sundial a solid base from which to fund its other operations. Meanwhile, it sees significant growth opportunities for the much newer cannabis retail operation. Given Sundial’s strong balance sheet, it should have the resources to maximize the potential of these brands.
SNDL Stock Verdict
Like with Tilray (NASDAQ:TLRY), the odds seem to favor Sundial making a comeback once the calendar flips to 2022. Sundial in particular had generated significant positive momentum just recently. Nothing fundamentally happened with the company that would explain the sudden reversal from 90 cents per share back on down toward the 52-week lows.
Longer-term, Sundial still has things to prove. The company is evolving from a largely unsuccessful cannabis-growing model to a more diversified business involving marijuana retail and cannabis financing operations. These hold more promise.
Admittedly, management still has to prove itself as capable of turning that potential into results. That said, the odds favor the bulls in SNDL stock, at least for the first part of 2022.
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On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.