Sundial (NASDAQ:SNDL) stock is down more than 40% in the last month, and the downward spiral shows no signs of slowing. After getting a new lease on life, courtesy of r/WallStreetBets, the cannabis producer is once again in trouble.
And management is not helping matters.
It recently filed a prospectus for an at-the-market offering of up to $800 million. Though disappointing, the move is not surprising.
Although shares have fallen almost 75% from their 52-week high, they are still trading at a dollar a pop, still up substantially from 14 cents in September. Sundial management is taking the opportunity to sell a lot of stock at this time and drum up cash.
But the thing is, why is the company raising so much cash?
There are no major M&As on the horizon, and the company has not made any significant investment since purchasing $58.9 million of senior secured debt in a subsidiary of Zenabis Global, a fellow Canadian recreational & medical marijuana producer.
Meanwhile, all this equity is coming at the cost of existing stockholders. As InvestorPlace‘s Mark Hake points out in his excellent article, a majority of the stock price now consists of cash and just a small slice of it belongs to the cannabis business.
This stock still has to fall a lot more. Book your profits and invest elsewhere.
SNDL Stock and the Magic of Reddit
Despite calls for greater regulation, Redditors remain a powerful force in the investing world. Gamestop (NYSE:GME) and other “meme stocks” such as AMC Entertainment Holdings (NYSE:AMC), BlackBerry (NYSE:BB), and Nokia (NYSE:NOK) continue to oscillate wildly.
However, the Reddit fairy dust is starting to wear offfor companies like Sundial. Plus, management does not seem all too concerned with the stock price at the moment.
At least that is what you feel when you see the cannabis producer is looking to raise up to $800 million in gross proceeds from an at-the-market offering.
According to the cannabis producer, proceeds from the offering will be used for working capital and general corporate purposes and possible acquisitions or investments.
As of March 15, the company’s unrestricted cash stood at $575 million. Another $800 million won’t make much of a difference unless there is something the management knows about that we don’t.
Aphria-Tilray Merger Is Where the Action Is
In December, Aphria (NASDAQ:APHA) and Tilray (NASDAQ:TLRY) announced they would be merging in an all-stock deal, creating the biggest pot company in the world by sales, with a combined equity value of about $3.9 billion.
Although several months have passed, it’s still the biggest piece of news in the industry.
Out of the two, Aphria is clearly the stronger company. Like its peers, it’s also struggling in the ailing marijuana industry. However, it has superior operating metrics in comparison to Tilray. And its stockholders hold all the aces in this merger.
Under the terms of the merger agreement, Aphria shareholders will receive 0.8381 Tilray shares for each Aphria share they own. Meanwhile, Tilray shareholders will not see any adjustment to their holdings.
The deal is structured as a “reverse acquisition” of Tilray. It will give Aphria shareholders 62% of the outstanding share capital of the surviving company.
As we move closer to the merger close, investors will continue to take advantage of the merger arbitrage opportunity through buying Aphria and shorting Tilray in the near term.
After the merger close, the company will become one of the best bets in the cannabis sector due to its scale and size. On the other hand, Sundial continues to struggle.
In the last six quarters, the company hasn’t reported a single earnings beat. The top line has fallen by 17.8% in the last year, and every operating metric is in the red at the moment. Overall, SNDL stock is a very risky proposition to have in your portfolio.
When you have a major M&A like the Aphria-Tilray merger to play with, one can easily guess where your attention will be for the foreseeable future in the industry.
Bottom Line: Book Your Profits
You should exit your position in SNDL stock as soon as possible. There is no upside in this one. Among the six analysts polled by CNN Money, the consensus is that SNDL stock trading at a 28.57% premium to its last trading price around $0.85 per share.
Barring any major M&A activity, SNDL stock has only one way to go—down.