Sundial Growers (NASDAQ:SNDL) stock is up 94.9% year-to-date, but there is cause for concern.
SNDL stock has lost 36.8% in the last month. So it seems that the cannabis producer’s Reddit-induced rally is done and dusted.
Welcome to the world of Reddit investing, where weakness can become a source of strength.
If the short interest as a percentage of a company’s float is high, it can be a sign of trouble. However, Redditors have rallied around such companies with the main aim of spanking hedge funds or other large investment entities and make a nice profit along the way.
That does not mean there is no inherent value in owning meme stocks. But fundamental analysis will not help you a lot if you want to understand the price action of these securities.
Instead, subreddits are largely responsible for the wild swings in price for these meme stocks.
However, the key thing to remember is that the Canadian cannabis company does not have good operating metrics. Therefore, if you still want to invest in the cannabis space, other stocks such as Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) offer more value.
Reddit Resurrects SNDL Stock
Participants on r/WallStreetBets, which sparked a price spike in GameStop (NYSE:GME) that squeezed out Wall Street short-sellers, turned their attention to cannabis firms at the beginning of this year. That is the primary reason why Sundial shares surged more than 745% in early 2021.
But the market has cooled down, and many cannabis stocks saw their share price falling back to pre-November levels. That was when investors hoped for swift decriminalization of marijuana under U.S. President Joe Biden.
Decriminalizing marijuana is still a crucial issue for millions of Americans. But federal legalization is not a straightforward affair. The markets are realizing this now.
However, there are still some investors that do not want to part with their investment. They are hoping another short-squeeze is around the corner.
They have seen what has happened with GameStop and AMC (NYSE:AMC) recently and so are skeptical of any piece of information or analysis that tells them otherwise.
Meanwhile, Sundial’s management has taken advantage of the recent rally to raise huge amounts of capital, and it is now pivoting to focus on mergers and acquisitions (M&A) activity.
You cannot fault the company for doing this. It now has no debt and $1.1 billion of cash.
Using some of that capital, Sundial invested in a few Canadian cannabis companies and announced a JV with a local investment firm, SAF, to exploit cannabis-related opportunities globally.
But the writing is on the wall.
The operating results of the company are not good, and Sundial spent the last year issuing and selling shares on the open market, including issuing 741 million shares during Q1 alone.
With shares slowing down, now is the time to take your profits on SNDL stock and look elsewhere.
How Does Sundial Compare With Peers?
Canopy and Tilray are two of the biggest names in legal cannabis. Both of these companies are much better bets if you want exposure to the Canadian cannabis space.
Canopy Growth has distribution and production licenses in more than a dozen countries. Although a Canada-based multi-brand cannabis company, it has an option to gain access to the lucrative U.S. market in a $3.4 billion deal.
Back in April 2019, Canopy Growth agreed to purchase Acreage Holdings subject to U.S. federal cannabis legalization. So, it has a plan for the American market if the “triggering event,” occurs.
Tilray has been in the news recently for its megamerger with Aphria, forming one of the biggest diversified marijuana, hemp, and beer companies in the world. The combined company is expected to deliver $78 million of pre-tax cost synergies within 24 months of the deal closing.
In the last three years, Canopy and Tilray have increased sales revenue by 91.3% and 154.6% and boast gross margins of 12.3% and 31.6%.
Last year, the U.S. saw extraordinarily strong sales of legal cannabis, up 46% from 2019 to a record $17.5 billion. But since Sundial, Canopy, and Tilray are essentially Canadian cannabis stocks, they could not enjoy the spoils of this massive spike.
However, Sundial’s rivals have a much better chance to exploit any potential legalization due to their size and strong operational metrics.
Cash in Your Chips
Sundial management deserves credit for making the best out of a bad situation. The company now has a sizable war chest for M&A activity and has improved its balance sheet by restructuring debt and raising equity.
However, its cannabis operation is sub-par in Canada. It sold 36% more kg of cannabis in 2020 without growing revenues. The company doesn’t have brands with material market share and revenue growth prospects needed to justify the current market cap.
If you still have SNDL stock in your portfolio, exit your position. There are plenty of high-quality U.S. MSOs out there.
And if you still want to invest in the Canadian cannabis space, the two other options explored in this article are not bad either.
On the date of publication, Faizan Farooque 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 InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.