We’ve seen a lot of volatility in Sundial Growers (NASDAQ:SNDL). It hasn’t quite been like the move investors have seen in GameStop (NYSE:GME), but it’s a similar idea driving these names. SNDL stock continues to hover below the $2 mark, which is a warning in itself.
This name and several others have been caught up in the WallStreetBets Reddit hype.
From a price mechanism perspective, there was reason for some of these names to rally. GameStop was the focal point of that move, given that its short interest was north of 100%. However, that doesn’t mean the company can justify its elevated stock price based on valuation.
SNDL stock was caught up in that move, as a whole host of Reddit faves burst higher. In the case of Sundial, shares went from roughly 50 cents in late January, and briefly surpassed $3 on Feb. 11.
The rally was good for almost 700% in just a few days of trading. But let’s leave SNDL stock for the adrenaline seekers out there. From a fundamental perspective, it just doesn’t look attractive.
Breaking Down Sundial Growers
Sundial Growers is a cannabis company located in Calgary, Canada. While cannabis stocks have garnered plenty of attention this year, not all are created equally.
Specifically, many of the opportunities currently reside in the U.S. That’s as the country makes a push toward decriminalizing and legalizing marijuana. More states are getting on the bandwagon of legalizing cannabis for both medicinal and recreational use.
Like sports gambling, states are looking for new ways to generate tax revenue. That’s particularly true given the hardships caused by the novel coronavirus. Further, with Democrats taking hold of the House, Senate and White House, cannabis bulls are optimistic about potential legalization at the federal level.
However, all those catalysts bode well for companies operating in the U.S. and will likely have a much smaller impact or no impact on Canadian companies, like Sundial.
At the moment, Sundial isn’t exactly thriving. When the company reported earnings in November, net revenue of $12.9 billion CAD decreased over 50% year over year. While the company reduced its debt in the quarter, it remains in a tough spot. From management:
“Having entered 2020 with a challenged capital structure, and a disparate business model, our team has moved aggressively to focus our operations and product portfolio to get the very best from our high-quality people and assets.”
It sounds promising, but let’s remember that high-quality stocks generally don’t trade below $2.
It’s possible that SNDL stock — like other cannabis stocks that have caught fire — takes enough positive steps to right the ship. It’s totally possible, but that makes this stock a spec play, not an investment. And an investment is what we’re after.
The Bottom Line on SNDL Stock
In the company’s most recent update on March 17, the situation remains challenging but looks better. Sundial paid down its debt and is focused on optimizing its operations.
However, it’s still a spec play in my mind. Canadian cannabis companies have potential, but the stocks with real momentum right now are in the U.S.
As individual states legalize marijuana and as potential rests at the federal level, companies with U.S. exposure are the ones we want to focus on. Sundial is open to gaining that exposure, but as of now, it’s not the direct play. From the company:
“Sundial continues to explore strategic opportunities to deploy capital with a focus on maximizing shareholder value. This strategy may include a potential merger or other business combination, direct or indirect investments in other cannabis companies both in Canada, in the United States and internationally.”
But just because there’s a willingness, doesn’t mean it will happen.
For now, we’re avoiding SNDL stock. The volatility is too high, the Reddit hype isn’t a secular investment theme and we want strong businesses with solid growth. While there’s opportunity in cannabis, we need to be picky.
On the date of publication, neither Matt McCall 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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