Down nearly a quarter in the past month, the situation with Sundial Growers (NASDAQ:SNDL) stock remains largely the same.
Meme traders have long since bailed on SNDL stock. Investors who buy on fundamentals are staying on the sidelines – mostly because of its poor operating results and history of shareholder dilution.
But while you may not want to buy the Canada-based pot company’s shares today, you may want to keep them on your watchlist. Down the road, no matter which path it takes to remedy the issue with its sub-$1 share price, it’ll likely result in SNDL stock dropping to a more than reasonable valuation.
Right now, Sundial is hanging by a thread when it comes to its Nasdaq listing. The company has until Aug. 8 to get the stock back up to $1 per share for at least 10 trading days. Otherwise, it’ll lose its listing and be forced to move down to the over-the-counter (OTC) market.
With a reverse split likely the only way of Sundial remaining on the Nasdaq, and with a delisting a likely downward driver too, this upcoming development will likely make SNDL stock truly “cheap” in terms of both price and valuation.
The Latest With SNDL Stock
Scrambling to maintain its major market listing isn’t the only thing going on with Sundial Growers right now. In addition, it’s still in the process of completing its acquisition of Alcanna (OTCMKTS:LQSIF), a Canadian liquor retailer that also owns a majority stake in marijuana retailer Nova Cannabis (OTCMKTS:NVACF).
Planning to close the deal by March 30, this takeover stands to be a big positive for SNDL stock. Profitable on an EBITDA basis, Alcanna could help its soon-to-be parent get out of the red. There are also cost synergies from combining Nova Cannabis with the company’s existing Spiritleaf retail unit.
However, the transaction has failed to renew bullishness among investors. Similarly, there’s little buzz surrounding the other aspect of Sundial’s diversification strategy: its move into providing debt financing to other pot companies. By collecting a high rate of interest on its debt investments, the venture (which it committed hundreds of millions to) could also improve Sundial’s operating performance.
Yet while good for the bottom line, it may not be enough to move the needle. There’s high uncertainty over whether its operating performance will improve.
Bad News Either Way
At today’s prices, SNDL stock trades for around its tangible book value. Shares look less pricey than they do if you compare them just to the stock’s price-sales ratio. On the other hand, there’s no guarantee that its liquidation value is a floor for the shares.
For starters, you can argue that there’s merit in pricing in a discount into even its tangible assets. A large amount of its asset base now consists of the above-mentioned loans to other pot companies. With their higher yield comes higher default risk. Also, whether the Alcanna deal works out or not, Sundial could still find itself hemorrhaging cash if it continues to make a go at building its branded cannabis business.
This could result in further cash burn, meaning the $594 million in its war chest today could dwindle between now and year’s end. Most importantly, developments in the months ahead could spark a big move lower for SNDL.
Again, it needs to trade for at least $1 per share by Aug 8. Barring another meme wave, it’ll have to achieve this through a reverse stock split.
Reverse splits for penny stocks can be a negative, as it makes it much easier for short sellers to pile in. Alternatively, the company could delist from the Nasdaq and move over to OTC. Yet this too could be a negative, as it will lower its accessibility to retail investors. If it goes that route, many individual investors holding it could cash out ahead of the move.
Wait for a Big Discount Before Buying Sundial
Sure, with its upcoming earnings report, a move back to $1 per share could come organically for Sundial. Then again, we could see the company again report lackluster results, making it a near-certainty that it’ll reverse split or delist in a few months.
The silver lining, however, is that this could result in a big discount being priced into shares. Instead of trading at liquidation value, it could move down to trading for 70% to 80% of book value.
Once it has a higher margin of safety, the risk/return proposition with SNDL stock will become favorable. But until then, holding off on it is the best move.
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.
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