Shares of GameStop (GME 0.21%) soared more than 1,600% in January, even though the outlook for the video game retailer continues to look grim in what's become a more digital world for gamers. Retail investors looking to send a message to Wall Street helped the stock reach unimaginable heights, forcing a short squeeze on those who were betting that the company's shares would fall. But with news that some brokerages, including Robinhood, which is popular with young retail investors, have begun imposing restrictions on trading the stock, its value could start coming down in the days and weeks ahead if the buying subsides. Even without restrictions, it's likely that GameStop's shares will start to fall as investors choose to cash out on their lucrative profits.
Retail investors have recently also started buying up shares of Nokia and AMC Entertainment Holdings, two other troubled businesses. And there's another stock that also saw a large surge in its share price last week: Sundial Growers (SNDL -3.16%). Could this struggling marijuana company be the next one to take off? Let's take a closer look at why that may or may not happen.
Sundial soared more than 37% in one day, despite no news
On Thursday, Sundial's stock closed at $0.825, a 37.3% increase from the previous day's close of just $0.601. And that was after the stock had fallen from a high of $1.36. Not only was the stock price up, but it was also more active, with investors trading more than 2.1 million shares on Sundial during the day. In the week before, the stock's daily trading volume remained below 300,000. The company issued no press releases and this was the same day that brokerages began to limit trading on GameStop.
The next day, as trading restrictions on GameStop eased, Sundial's volume dropped to 1 million and the stock fell to $0.815. However, the drop in price can be attributed to a $100 million stock offering that the company announced that day, wasting no time to take advantage of the spike in its share price. Without the offering, it's likely Sundial's shares would have continued rallying.
If retail investors aren't able to buy shares of GameStop, the marijuana stock could remain in high demand. It's currently on the Robinhood Top 100 list, which is a great place to figure out what stocks are hot with retail investors.
Why Sundial may not follow in GameStop's footsteps
However, even if Sundial becomes the target of retail investors, that doesn't mean its shares will reach the astronomical levels that GameStop did. One of the reasons GameStop soared was due to a short squeeze, as many investors were shorting the stock, expecting it to fall before this recent surge. And compared to GameStop, and to a lesser extent even AMC, the percentage of Sundial's outstanding shares that are short is very modest:
Sundial investors should temper their excitement, because there isn't as much potential for the stock to soar to GameStop-like levels. And even if the stock does take off again, management could follow suit with another stock offering.
Cash is important in the marijuana industry, and taking advantage of a high price is something Sundial's management may not be able to resist. On Dec. 30, 2020, the company announced that it was acquiring a special purpose vehicle that owned 58.9 million Canadian dollars of senior debt from cannabis producer Zenabis Global. Prior to the closing of the deal, Sundial says its cash was CA$110 million. And in the nine-month period ending Sept. 30, 2020, the company burned through CA$45.3 million from its day-to-day operating activities. Boosting its cash reserves will be crucial to providing stability for the business over the long term.
Should you buy Sundial stock?
It may be tempting for investors to jump on Sundial's bandwagon, especially if the stock continues to rally. But the danger is that even if shares of Sundial surge as a result of this recent market volatility, those levels won't be sustainable over a long period. This is still a company that has big question marks: The fact that net sales of CA$47.1 million over its last three quarters were down 3.6% from the previous year is just one red flag. And during that time, Sundial incurred operating losses of CA$151.5 million -- nearly five times the CA$31.2 million loss it incurred a year earlier.
The stock is a risky buy, and adding more volatility into the mix only makes things worse. Investors are better off waiting for things to calm down in the markets and for this recent spike in trading to fall back down before making an investment decision. Buying into this artificial rally could set investors up for some big losses.