When Sundial Growers (NASDAQ:SNDL) spiked to $3.96 last week on strong volume, the jump looked too good to be true. By the end of the week, the extraordinary jump proved short-lived. SNDL stock closed at around $2.
How did a stock with a short interest of under 6% spike? The stock did not rise on a short-squeeze. Instead, a coordinated surge in buying cannabis stocks is responsible for what looks like a pump and dump play.
Red Flags with SNDL Stock
The lack of Wall Street coverage on SNDL stock is a red flag. Analysts are often late in stock calls, but as shown below, the “hold” rating is a warning to “sell” the stock:
Most analysts rate the stock a ‘hold,’ which means it is a stock to sell.
Data Courtesy of Stock Rover
Sundial stock rose alongside the jump in Aurora Cannabis (NYSE:ACB) and Tilray (NASDAQ:TLRY). The phrase that a rising tide lifts all boats is an understatement. Sundial, along with the others, fell to just above their 20-day moving average line.
At the beginning of the month, Sundial’s 60.5 million Series A direct offering should have scared away investors. The Canadian cannabis producer sold a common share and a one-half warrant to raise $74.5 million.
The company effectively sold more shares than cannabis. For example, the firm posted a 2020 second quarter revenue of 20.2 million CAD (details below).
On Jan. 29, the company sold 100 million Series A units for 75 cents a share, raising $100 million and on Dec. 4, 2020, it had filed a preliminary prospectus that allowed it to raise up to $200 million.
Opportunity Came and Left
Before the stock’s incredible rise to about $4, the dilution to shareholders was good news. It let the company raise cash to pay down its debt.
In the second quarter, Sundial posted revenue growing 44% year-on-year to 20.2 million CAD. Its branded product average gross selling price (“ASP”) rose by 11% to 5.67 CAD. The company lost 31.6 million CAD.
The impairment provision of 13.4 CAD million on dried cannabis and cannabis extracts lowers the unknown risks for investors ahead. For example, Sundial is unlikely to take any additional write-downs this year. Besides, its supply chain capabilities are better. Its On Time In Full product delivery metric was above 90% in Q2.
Management indicated on the Q2 report that it would cut its leverage. By cutting its debt, increasing its liquidity, and lowering its cost of capital, Sundial will operate competitively.
The company is implementing data-driven consumer insights and analytics in the back-end systems. This should enable the company to respond quickly to the ever-evolving consumer preferences. Investors must watch the operating margins each quarter. It needs to increase consistently to demonstrate that the technology investment is paying off.
To increase ASPs, Sundial’s product mix for inhalables must stand out against its competitors. Furthermore, it needs to have potency levels of THC above 18%. Customers will prefer companies with stronger THC levels, driving sales higher.
As cliché as it is, management cited a need for cost discipline and optimal variable cost structures. So long as cannabis demand grows and the addressable market expands, the company must accelerate sales at a faster pace than the increase in costs. Still, investors who paid almost $4 for Sundial shares last week will not care about profitability. The company could post quarterly losses and rising revenue. The stock should still hold the $1-$1.50 level.
The frightening rise in momentum for cannabis stock gave investors little time to react. Shareholders who missed out on selling at the stock’s peak are unlikely to get another chance. If a short-squeeze in TLRY stock happens again, it might create another exit price.
Per Tipranks, TLRY stock has an average price target of $19.38. The short float is 32.31%. Retail speculators may try again to buy the most short-sold stocks.
Cannabis investors have better stocks to consider besides Sundial Growers. Investors may get a second chance to sell at higher prices. The intra-day volatility is far from over. Avoid buying the stock on such days to minimize the risk of holding a company that loses money every quarter.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.