Sundial Growers (NASDAQ:SNDL) has been losing its momentum as a meme stock and a hot cannabis stock. It has one-year losses of about 14% and a chart that is a mostly flat line except for a surge in February 2021.
I have written two previous articles on SNDL stock: “Why Sundial Growers Is a Gamble in the Cannabis Industry” and “Sundial Growers’ Only Chance Lies with Unlikely U.S. Legalization.”
I did not like the stock when I wrote these articles, arguing that the major headwind is fundamentals with a net loss and declining revenue, high stock dilution, and a cash burn problem. The danger of SNDL stock getting delisted from the Nasdaq is also a major risk. The question of when and if the U.S. will legalize marijuana on the federal level is a huge catalyst for Sundial Growers.
I continue not to like SNDL stock in 2022. I have four arguments to support my thesis on being bearish about this cannabis stock.
U.S. Federal Reserve’s Latest News
The U.S. stock market did not react positively when the U.S. Federal Reserve (Fed) released minutes from its December meeting on Jan. 5, 2022. There was a strong selloff across all major stock indexes, with tech stocks and small-cap stocks underperforming as the Nasdaq and Russell 2000 both had losses of approximately 3.3%.
The Fed signaled that more aggressive moves about the tapering of asset purchases and tightening of its monetary policy may occur sooner than expected. The expectation of an interest rate hike by the Fed in March 2022 carries a very high probability now. The December private payrolls figure of 807,000 was a beat on expectations and supports a strong economy.
In a strong economy, inflationary pressures are the norm, as is now the case for the U.S. economy. High crude oil prices hovering near $78 per barrel do not help mitigate the high inflation phenomenon. On another note, a strong economy needs a strong local currency. It is a chain of economic events that leads to raising interest rates in the U.S. sooner than expected.
The U.S. will soon have a tighter monetary policy. The new environment will likely result in stock and sector rotation by large institutional investors which will now emphasize valuations. Higher interest rates lower the valuation of stocks. In this context, speculative stocks, such as Sundial with poor fundamentals and elevated prices, should witness selling pressure.
I consider 2022 as the year meme stocks will finally stop. It was not rational after all, even with flat interest rates in 2021.
Investors in SNDL stock may want to refresh their memory and remember that Sundial Growers sold 11 million shares for $13 a share in its initial public offering (IPO) in 2019. The latest closing stock price of $0.59, represents a 95% loss. Sundial Growers is without any doubt an IPO that flopped.
Massive Dilution for SNDL Stock
In 2021, Sundial Growers stock was subject to a massive stock dilution.
In March 2018, the company had 62 million weighted average diluted shares outstanding. In September 2020, the number increased to 206.7 million. By late December 2021, this figure had increased to 2.05 billion. An increase of 3,206% from 2018 to 2021 is not just excessive, but it is a continuous disaster for the intrinsic value of SNDL stock.
Q3 2021 Earnings: a Surprise Profit
In its third-quarter (Q3) 2021 financial results, Sundial Growers reported a profit of 11.3 million CAD. In the past years and quarters, the company was unprofitable. Has a turnaround occurred?
I argue that it is too early to turn bullish for two reasons. Firstly, over a year, Sundial Growers incurred losses of 239 million CAD. Secondly, the net income was attributed to a change in estimate of the fair value of derivative warrants and income tax recovery.
A figure of 57.28 million CAD for free cash flow in Q3 2021 shows that the cash burn problem for Sundial Growers persists.
The Risk of a Nasdaq Delisting
And the risks keep coming: Nasdaq has Sundial Growers on its list of non-compliant companies. The delisting risk is still high for the company as long as its stock remains below $1 per share.
Overall, 2022 will probably be a very tough year for Sundial Growers. Beware of the risks mentioned and do not get excited by its low stock price. It is a penny stock to avoid. Seek other high-quality investment opportunities, especially if a stock rotation out of risky assets starts to develop soon.
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On the date of publication, Stavros Georgiadis, CFA, 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.