In my last article on Sundial Growers (NASDAQ:SNDL) stock, I discussed how Sundial was more reasonably priced than it appeared at first glance.
Perhaps not in terms of its market capitalization relative to its profitability. But with its share price not that much higher than its tangible book value per share? At current prices, it appears to be a low-downside, high-upside type of opportunity.
That said, giving the situation a second thought, there is something that could put more downward pressure on SNDL stock: a reverse stock split.
This is something the company is likely to execute in order to stay listed on the Nasdaq exchange. Based on similar situations, this may result in another big sell-off for the Canada-based cannabis play.
However, if another sell-off happens, it may push SNDL stock into deep value territory. Not only that, there’s still a chance that its recent wheeling-and-dealing pays off. Given these factors, a drop to value stock territory for shares could make this a can’t-miss, albeit risky, opportunity.
SNDL Stock and a Possible Reverse Split
Trading for under $1 per share for quite some time, the risk of delisting is looming over Sundial Growers. Recently, Nasdaq gave it another 180 days to be in compliance with the exchange’s minimum bid price requirements.
In other words, before Aug. 8, SNDL stock needs to trade for more than $1 per share for 10 consecutive trading days. It could achieve this by getting the stock (at around 66 cents today) up to this level. Or, the company could decide to instead do a reverse stock split, say, on a 10-to-1 basis. Shareholders would receive on new share for every 10 existing shares held now. This would, in theory, change its stock price from 66 cents to $6.60.
If it chooses to go this route, there are positives and negatives. On the pro side, Sundial would maintain its major market listing. Otherwise, it would likely move over to the over-the-counter (OTC) market. A move to the OTC market could limit access to SNDL stock, causing a drop in its valuation.
On the con side, a drop in share may be inevitable as reverse stock splits in general can put more downward pressure on a stock.
Why? Many holding the stock may be doing so, under the erroneous belief that its low absolute price means high upside. Although I believe the stock does have high upside, these types of investors/traders may sell anyway after a reverse split, believing that the “get rich” potential with shares is diminished. Also, a move out of penny stock levels will make the stock much easier to short.
From Value to Deep Value
At current prices, I believe that SNDL stock is a value play. Admittedly, not a value play in the Graham-and-Dodd sense. Still operating in the red, it’s not cheap on a price-earnings (P/E) basis. Trading at a premium (although a slight one) to its tangible book value, a lack of a discount also makes calling a value stock a stretch.
But a reverse split could change all that. Whether due to retail traders cashing out if it ceases to be a penny stock, or from short-sellers betting against it due the perceived uncertainty over its prospects, doing this could result in Sundial shares experiencing another double-digit percentage decline.
That would send the price well below its tangible book value. Today, SNDL stock trades for 1.17x tangible book value. If it drops 30% from here after a potential split, it would fall to just 0.82x of tangible, or an 18% discount. A 40% drop would push the stock to a 30% discount to tangible book.
Sure, it would make some sense why shares could move to a price that discounts the value of Sundial cash, investments, and other more liquid assets. Much of the company’s capital is now tied up in the debt investments it’s made in other pot companies. While paying out a high rate of interest, default risk on these loans is high as well. It’s also not for certain that the Alcanna (OTCMKTS:LQSIF) deal will deliver the improvements to profitability many (including myself) expect it to bring.
The Bottom Line
Like I’ve discussed before, the potential of its M&A (mergers and acquisitions) strategy, plus its debt investment unit, could result in the pot company, while still struggling to make its main business profitable, becoming worth more as an enterprise than the market values it today.
Even so, a likely reverse stock split may result in another big drop for shares. Yet another plunge could make it a bona fide deep value play. If a reverse split happens, and there’s a post-split drop, you want to consider diving into SNDL stock.
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On the date of publication, Thomas Niel did not hold (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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.