It didn’t take long for the euphoric rally in cannabis stocks following President Joe Biden’s election to fizzle out. You can thank a renewed focus on valuations and regulatory headwinds for that. Among the stocks to crash and burn was Canadian cannabis producer Sundial Growers (NASDAQ:SNDL). SNDL stock is down nearly 90% since its post-election and meme-stock-frenzy high made roughly a year ago. And it’s lost close to 50% of its value just since mid-November.
Trading just below 50 cents a share, SNDL stock looks attractive for investors with a medium-term investment horizon. Considering the company’s fundamentals, I would not be surprised if shares double from here.
There’s plenty of reason for optimism. According to Grand View Research, the global legal cannabis market is expected to grow at a compound annual rate of 26.7% and hit $70 billion by 2028. In Canada, one analyst forecasts the recreational cannabis market will see a CAGR of 13.4% between 2021 and 2030, hitting 12.3 billion Canadian (about $9.7 million). And Tilray (NASDAQ:TLRY), a leading cannabis player, believes the global cannabis market is at an inflection point and represents a $186 billion-plus opportunity.
Of course, growth in the industry has been slower than expected. Cash burn has resulted in a flurry of mergers and acquisitions. However, there is little doubt that the industry will continue to grow. This is good news for companies that can survive the current phase of negative cash flow and regulatory headwinds.
As a penny stock, SNDL stock is speculative by nature. However, the company looks strong from a fundamental perspective with a number of potential catalysts for a rally.
Cash Flows From Investment Segment
In 2021, Sundial opportunistically raised funds through equity dilution. The company has been utilizing these funds for organic and inorganic growth.
In the investment segment, Sundial has stitched a partnership with SAF Group. The joint venture, which goes by SunStream Bancorp, has been investing in debt, equity and hybrid opportunities in the cannabis segment.
At the end of September, Sundial had 489 million CAD in investments deployed, including 323 million CAD to the SunStream Bancorp. Further, as of Nov. 9, the company had a cash buffer of 571 million CAD to invest in various opportunities.
As InvestorPlace’s Louis Navellier points out, Sundial generated more than 20 million CAD from its investment last year. And with an investment pipeline of 1 billion CAD, the company is likely to see strong growth in investment income in the next few years.
It’s worth noting that Sundial’s portfolio of credit-related investments was on track to deliver an annualized return of 13% for 2021. If the SAF Group partnership continues to deliver positive results, it’s likely that the investment target will be increased. And as the global cannabis industry grows over the next five years, these investments could be cash flow machines.
Growth From Its Own Portfolio of Brands
Besides growth from investments, Sundial also has its own portfolio of brands. This includes premium and value brands with a focus on inhalables.
Sundial acquired Spiritleaf’s retail cannabis network in July, making the company the “largest single-branded network of retail operations,” according to the press release. As of Nov. 9, Sundial had 109 Spiritleaf stores open, up 14 from July.
And in October, Sundial announced it was acquiring Canadian liquor retailer Alcanna. This deal came with a majority equity interest in Nova Cannabis, further increasing the store count by 62.
I believe there are two key advantages to this deal. First, the retail presence will boost revenue. Second, the company can expand its own brand visibility by leveraging its extensive retail footprint.
The Bottom Line on SNDL Stock
I like that Sundial has been focused on Canada for growth. Further, through its investment channel, the company is likely to remain geographically diversified.
Like other cannabis plays, SNDL stock has been a laggard. Additionally, a massive dilution in 2021 impacted investor sentiment.
Yet, it seems Sundial is making the right moves towards value creation. Once investment income accelerates and has a meaningful impact on the EBITDA, share are likely to trend higher. I would not talk about multi-fold returns, as the broader market is jittery. But SNDL stock could potentially double over the next 12 months.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
