Here's a big thank you to the Reddit community. You've definitely made investing even more interesting than usual so far in 2021. Even investors who aren't on Reddit have been impacted by the waves made by those who are active on the online platform.
Recently, Reddit users have been a major force behind the turbocharged returns of several marijuana stocks. Canadian cannabis producer Sundial Growers (SNDL 2.04%) especially stands out in that group. But is it too late to buy this red-hot Reddit pot stock?
Dialing up big gains
In 2020, Sundial Growers' shares plunged 84%. At one point last year, the pot stock had lost over 95% of its value. Ouch.
But what a difference a new year can make. Sundial's sob story has turned into a rousing celebration in 2021. The following stock chart sums it up pretty well.
What happened? Reddit users started talking about Sundial, and they began buying up shares. That prompted other investors to jump aboard the bandwagon.
The party continued to rock along until Sundial had skyrocketed over 520%. The stock skyrocketed 79% in a single day earlier this week. On Thursday, though, the fun came to a halt. Investors started to sell pot stocks, including Sundial.
Does this pullback present an opportunity to buy Sundial? Or is it just the beginning of a steep decline?
What's really important
To answer those questions, we need to dive into what's really important for Sundial Growers. Hint: It's not the stock price.
One thing that's critical for Sundial is its cash position. At the end of September, the company had 21 million in Canadian dollars in cash and cash equivalents. Considering that Sundial lost more than CA$71 million in the third quarter, that cash position could be viewed as problematic, to say the least.
However, Sundial raised CA$48 million after the end of Q3 through a stock offering. It also took advantage of its huge stock run-up and closed another stock offering earlier this month that generated gross proceeds of $74.5 million.
These moves helped alleviate Sundial's short-term cash worries. They didn't address the bigger underlying problem, though: The company continues to lose a boatload of money.
Sundial is taking some steps to attempt to stop the bleeding. It's worked to improve its cultivation processes and is focusing more on products with high THC potency that customers want. Sales could rise this year as COVID-19 concerns fade.
Another thing that's really important is valuation. Let's be candid here: A company with net revenue of CA$47 million (around $37 million) during the first nine months of last year and no realistic path to boost that number by a huge amount in the near future isn't worth $3.6 billion. Yet that's where Sundial's market cap stands, even after Thursday's decline.
I'm not bashing Sundial. Those are simply the facts.
The party's over (or soon will be)
Is it too late to buy Sundial Growers stock? My answer is an emphatic "yes."
Sure, shares could bounce back for a little while after the recent pullback. That could entice some to scoop up shares. My view, though, is that the party is probably already over, and if not, it soon will be.
The good news for investors who want to profit from the cannabis boom is that there are other stocks that are still great picks. The key difference between these stocks and Sundial is that they're profitable and generating strong revenue growth, with solid opportunities for continued momentum.
You can make fast money if you jump onto a hot stock quickly enough. I think that moment has passed for Sundial. But you can also make plenty of money by investing in a well-run company with great growth prospects and holding it long enough.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.