“Short-squeeze stocks” may be coming back to earth. But retail investors remain hot for “meme stocks.” And that’s the situation here with Sundial Growers (NASDAQ:SNDL) stock. With retail traders on Reddit’s WallStreetBets and other online platforms hyping it up, this “also ran” pot play has seen its shares take off significantly so far this month.
Opening at $1 per share on Feb. 1, shares hit prices nearing $3.50 per share, before falling back to around $2 per share as of Feb. 16. Those who got in early, when most were still focused on GameStop (NYSE:GME), have seen tremendous gains. However, those late to the party will likely not see similar results.
Why? Looking beyond the hype, there’s not much to be excited about with Sundial. Sure, the company now has plenty of cash in its coffers. But, as InvestorPlace’s Chris MacDonald wrote Feb 8, this came at the cost of heavy shareholder dilution.
There’s a turnaround in play. Yet, it’s still too soon to tell whether the company can dramatically improve its results in just a few quarters. And yes, there’s the legalization catalyst as well. Following the “blue wave” election results, we could see major reform of America’s marijuana laws with a Democratic party-controlled White House and Congress. However, this upside may be more than reflected in Sundial’s current valuation.
Bottom line: even if you are getting FOMO and feel an itch to buy in now, don’t. A few days back, it was heading to the moon, but buying any pullback now is like trying to catch a falling knife.
SNDL Stock, The Reddit Set, and Where Shares are Headed Next
Back on Jan. 31, I said “day traders wouldn’t save the day for Sundial.” While accurate in pointing out that this stock lacked the levels of short-interest needed to turn it into the next GameStop, I underestimated how quickly shares would become a top play among “meme stock” investors.
Once the madness in short-squeeze stocks faded, without skipping a beat, day traders returned to their old stomping grounds: “penny stocks.” While SNDL stock trades for far more than $1 per share now, technically it’s in that category, since it trades for less than $5 per share.
With many gambling on stocks rather than investing in them, low-priced names that trade on major exchanges have seen wild price moves as of late. Besides Sundial, other popular penny stocks among the Reddit set include Naked Brand Group (NASDAQ:NAKD), Ocugen (NASDAQ:OCGN), and Zomedica (NYSEAMERICAN:ZOM).
In addition, Reddit traders have also gone wild over pot stocks as well. Besides Sundial, names like Tilray (NASDAQ:TLRY) have seen wild moves higher (and lower) in recent days. But as this second wave of retail investor speculation fades, where are Sundial shares headed next?
The possibility of major U.S. marijuana reform could still move the needle. Given the upside from this development is now more than priced into shares, don’t count on progress in this area to provide investors buying in today a pathway for further gains.
A Legalization Lottery Ticket No Longer
Back when it traded for mere pennies, I deemed Sundial a “legalization lottery ticket.” In other words, the potential for a big rally on legalization news outweighed the heavy risk of losses with this high-risk stock. However, with its triple-digit percentage move higher, and with the above-mentioned dilution, this is no longer the case.
Why? Sure, with Senate Majority Leader Chuck Schumer pushing hard for game-changing reforms, complete legalization may be just around the corner. But with the increased share count, this former micro-cap stock now sports a $3.14 billion market capitalization. Based upon projected sales of $66 million in 2021, that means it trades today for a price-to-sales multiple of about 49 times.
Given that higher-quality pot stocks, like Canopy Growth (NASDAQ:CGC) trade for (relatively) less frothy valuations (23 times forward sales), why put your chips on Sundial? With the company still trying to figure out how to thrive in its home market of Canada, what are its prospects of becoming a profitable pot purveyor in America, much less, one that’s actually worth over $3 billion?
Bottom Line: Sell Sundial if You Own it, Avoid it if You Don’t
There’s little but hype backing up Sundial shares at today’s prices. Yes, it’s not fair to value this company on its near-term results alone. Improved U.S. legalization odds should be factored in. Just not to the tune of $3 billion.
So, what’s a more reasonable valuation for this stock? Taking the current Canopy valuation (23x sales), and discounting to account for risk, let’s go with 20x sales. That gives us a $1.28 billion market capitalization, or around 85 cents per share. In other words, if investors think Sundial will be like Canopy, there’s more than 59% potential downside from here.
With massive declines likely ahead, it’s time to sell SNDL stock if you own it. And avoid it if you don’t.