Stocks to sell

Another round of cannabis excitement has come and gone. Sundial Growers (NASDAQ:SNDL) is still standing.

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Why? It’s certainly not the financial results. Sundial brought in $45.4 million of revenue in 2020. In 2019 it brought in nearly $48 million. Do we have to talk about earnings? There aren’t any. There was a loss of $205 million for 2019, $2.39 per share, then another of $167.5 million in 2020. That’s a loss of “just” 77 cents per share. Uh, progress?

For some reason, this stock was worth as high as $3.96 in early February. It opened on May 17 at 70 cents. What’s the secret? Yes, Reddit is involved. But there’s also a bank and a private equity firm that are keeping Sundial operating. And there’s hope the legal logjam may break.

Why They Love SNDL Stock

Sundial’s market cap is currently $1.3 billion. Three are over 1.8 billion shares of SNDL stock outstanding.

The Redditors keep “buying the dip,” and the dip keeps going lower, as our Nick Clarkson reported recently.

Just wait for the earnings, the Redditors said.

OK, we waited. It was another loss, $134 million Canadian dollars, although this time there was an operating profit of 1.7 million CAD. (At this writing the Looney was worth 82.8 cents.)

The earnings release called this positive, noting Earnings Before Income Taxes, Depreciation and Amortization (EBITDA) of 3.3 million CAD. (That’s $2.7 million American.) Gross revenue was 11.7 million CAD, down 30% from the December quarter. CEO Zach George wrote, “We are pleased to announce Sundial’s first-ever quarter with positive earnings from operations and adjusted EBITDA.”

Sundial does have a Calgary bank backing it all the way: Sunstream Bancorp recently hiked its financing commitment to $188 million CAD. Does that sound good? The release adds that Sunstream is a joint venture between Sundial and a Calgary private equity firm, SAF Group.

Hope Springs Eternal

Like all big pot companies, Sundial is Canadian, because marijuana remains illegal under U.S. law. But there’s hope, because two Republicans recently introduced legislation to let states regulate it in the name of “individual liberty.” This is significant because in the past it has been Democrats pushing for legalization. Moves for legalization are always good for pot stock prices.

Despite this, and despite states like Colorado, Washington, and California having active pot marketplaces, pot is still a Schedule 1 drug. That means it’s treated like heroin or LSD under federal law. Even when states legalize sales, like Virginia, they don’t always release those sitting in jail for smoking it.

Hard to build a legal market in that environment, but Sundial is trying. It’s bottomed out and is ready to move, writes InvestorPlace writer Faisal Humayun, with a cash buffer of over $800 million. Where did this cash buffer come from? Let’s go back to the earnings release. “During the first quarter of 2021, Sundial issued 857 million common shares.” In other words, your stock just got watered down.

The Bottom Line

The marijuana business still has some serious problems, beyond being, you know, illegal.

The biggest may be that the illegal growers can get the product to buyers’ doors for about half what the legal growers must charge, after they finish jumping regulatory hoops. To make the business work, either the legal price comes down or the government puts cops to work going after the illegal stuff.

I also see no evidence that buyers are looking at brand names. Changing that is Sundial’s mission. According to its earnings call, high potency pot is sold under brand names like Top Leaf.

If, or when, pot becomes legal across the U.S., there will be a rush of new capital into the space. If you’re into making a profit, that’s when you want to get your money down on SNDL stock.

On the date of publication, Dana Blankenhorn did not have (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 Publishing Guidelines.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.