It is fair to say that from year to date in 2021 I have been on the wrong side of Solar growers (NASDAQ:SNDL) and SNDL storage. Up 339% YTD through February 12, the gains have helped put the cannabis grower in a better economic situation.
Solar investors (and management) have Reddit audience to thank for the sudden interest.
“It can be a good time to hop on the train for solar panels while it’s still a bit low. It’s just an earlobe, but it’s skyrocketing right now, ”said one passerby u / Cruely8 on Reddit’s r / smallstreetbets February 10th.
SNDL stock divided by warrants
To be clear, $ 74.5 million The Series A and Series B unit offerings made by the Calgary company ended on February 4, when it only traded around $ 1.15, not $ 2.08, it closed ahead of the three-day Presidential Day weekend. Two days earlier, the sundial closed one $ 100 million offer of Series A and Series B units with an exercise price of 80 cents on warrants.
Because warrants can be redeemed right away, buyers in both deals are already heavily in-the-money thanks to the masterpieces of Reddit followers.
Maybe that’s why SNDL shares have fallen sharply since hitting a 52-week high of $ 3.96 at the opening on February 11th. The buyers of the devices take profits and go home, possibly leaving the little guy to hold the (dime) bag again.
Charged to bears with CAD 617 million ($ 488 million) and no debt, can the cannabis company benefit from its newfound greatness? Or will it remove the cash on a poorly thought-out acquisition?
Let us consider both questions.
Lots of stocks circulating
In its second offering, Sundial said it had 1.52 billion outstanding shares. It’s a whole lot of stocks floating around for a company that only had a net turnover 47.1 million CAD through the first nine months of the 2020 financial year.
The worst part is not even the lack of sales through Q3 2020. It is the fact that sales in Q3 fell by 54% to CAD 12.9 million. On a on an annual basis, Sundial trades at 54 times sales while using 1CAD 51 million in free cash flow for the last 12 months.
The decline is due to Sundial increasing its branded sales to Canadian provincial boards and reducing its bulk sales to other licensed manufacturers. It’s part of its walk away from wholesale. It takes time to rebuild the lost revenue.
At this point, the smart game would be to keep working on nine provinces it has supply agreements to slowly build market share. Debt-free and cash in hand now is not the time to be distracted by a search, closure and integration of an acquisition. It could easily waste 12-18 months of precious time.
If management is smart, it will focus on getting its premium products (flowers, pre-rolls and vapes) in the hands of more Canadian consumers. The strike on medical cannabis through its 50% share in Sti Rx seems like a stretch considering how many major companies are already servicing the Canadian marketplace.
While it is tempting to issue more shares while the price is rising, we have seen what dilution means for stock prices over the last two years. It is not good.
An acquisition makes little sense
An acquisition at this point would negate all the good work Sundial CEO Zach George has done to correct the ship.
“By February 2020, the global pandemic was imminent, Sundial ran out of cash just two quarters after its IPO, and we were in breach of pacts under our senior secured credit facility.” George said in December after completing its financial restructuring.
“Through a combination of asset sales, debt swap shares, capital raising and cash repayments, we have eliminated $ 227 million in debt this year. Our financial restructuring is now complete, allowing us to put more focus on what really matters – consumer satisfaction. ”
If an acquisition is announced in the next few months, unless it is 100% acceptable for sales and earnings, I would run as fast as I could away from the solar cell inventory.
That would be a sure sign that the CEO’s job at the end of 2020 was only to clear the tires to put his own legacy and vision in motion in the company. Empire building usually ends badly.
Sundial still burns a lot of cash despite improving balance. A plus one, in this case, is not equal to three.
Maybe in 2022 or 2023, when brand sales have grown sufficiently.
The bottom line
On January 21, I argued that risk-to-reward for SNDL storage was not to your advantage. It has increased by 205% since.
Was I wrong?
I do not think so. I would say that the financial position of the company is immeasurably stronger than when I wrote it.
Competition in the Canadian market is still intense. Several companies have made much greater progress in market share, as well Canopy growth (NASDAQ:CGC), which is the leader in Canada by almost 16% of sales volume.
It’s okay to be a niche player. Empire building should not be in his plans.
Speculative investors should wait for it to fall below $ 2 before taking a flyer on the SNDL stock. I would not buy it, but that does not mean you should not.
At the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has been writing about full-time investing since 2008. Publications in which he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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