Given its big drop in recent months, I can see why many investors are passing up on Sundial Growers (NASDAQ:SNDL) stock. Back down well below $1 per share, sentiment has whipsawed from bearish to bullish to bearish for this Canada-based cannabis play.
During the early months of 2021, this low-priced stock zoomed more than seven-fold, to as much as $3.96 per share. It’s not for certain, but some may chalk this up to en masse buying by Reddit traders. It should be noted, too, that at the time, there was increased buzz surrounding marijuana stocks. This was due to speculation that the U.S. federal government was moving towards reforming the current laws on the books.
Whatever the reason for its surge, steadily throughout the year, Sundial has given back tremendous gains. The hype surrounding the pot sector has largely faded. The company’s decision to raise capital through dilutive secondary offerings also played a role in knocking it back to sub-$1 per share prices.
However, I wouldn’t look to its past declines as a sign of its likely future performance. Especially as the two different ways the company is putting its large cash position to work could help set the stage for a move back to higher prices.
SNDL Stock and its Recent Deal to Buy Alcanna
Much of the conversation with Sundial has revolved around if U.S. pot legalization happens. Many, including myself, have talked about the steady improvements to its operating business. For example, last quarter, adjusted EBITDA moved from red to green when it came in at $10.5 million for the quarter (versus a $4.4 million EBITDA loss in the prior year’s quarter).
However, there’s something else that could have a big positive impact on the price of SNDL stock down the road. Again, that would be its varied wheeling and dealing efforts. First, through acquisitions, like its announced purchase of a private liquor retailer, Alcanna (OTCMKTS:LQSIF). Buying this Canada-based liquor retailer not only gives it a business that’s already consistently profitable; it gives it a 63% stake in Nova Cannabis (OTCMKTS:NVACF), a cannabis retailer.
By consolidating Nova Cannabis with its existing cannabis retail operations (Spiritleaf), the company believes it can wring out $15 million in annual cost savings that will fall straight to the bottom line. Admittedly, there is one negative aspect to this deal: more shareholder dilution. Instead of using its hefty cash position to pay for this deal, it’s instead making this purchase an all-stock transaction.
Then again, considering the company is instead putting this money to work in the second part of its wheeling and dealing plans, it may be worth it.
Sundial’s Recent Debt/Equity Investments
Besides accretive acquisitions, this company’s management has another plan up its sleeve that could help move the needle for SNDL stock. That would be its plans to put its $593.5 million war chest of cash to work.
The way it added this money to its balance sheet may have not been the best for existing shareholders. Doing this resulted in increasing its outstanding share count from 918.8 million on Dec 31, 2020, to 2.06 billion today. However, the impact of this dilution may be already be accounted for in its stock price with its move to around 57 cents per share.
So, what does Sundial plan to do with all this cash? It’s putting it to work by making debt/equity investments in other cannabis companies. It is doing this both directly and via its SunStream Bancorp joint venture with investment management firm SAF Group.
Already making around $400 million worth of these investments, it plans to plow much of what remains of its cash positions into such vehicles. This is beneficial to the company in two different ways. First, these investments will create a high amount of interest income. Second, many of the companies it’s investing in are U.S.-based. This gives it exposure to the fast-growing U.S. pot market.
The Bottom Line With Sundial
Indirect investments may not be the most optimal way to expand into the U.S. For now though, it’s the only way it can. Until U.S. Congress reforms federal pot laws, Canada-based companies like Sundial will not be able to invest directly.
What’s the good news? It may not be this way forever, given how this once partisan issue is now getting support from both sides of the aisle. Still, I wouldn’t just buy this stock as a binary bet on pot legalization; not when there are catalysts at play that aren’t based upon the whims of Washington.
With its M&A and investments yet another sign it’s making the right moves, SNDL stock is looking more promising.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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