If you thought 2020 was a volatile year for the stock market, 2021 has a few tricks up its sleeve.
But it's not the coronavirus or any other fear in particular that's been driving volatility in equities. Rather, it's an all-out battle between momentum-focused retail investors on Reddit and Robinhood and perceived big-money institutional investors.
Beginning with GameStop, retail investors have piled into dozens of heavily short-sold and/or low-priced stocks with the purpose of driving their share prices into the stratosphere. In quite a few instances, it's worked (e.g., GameStop rose from $18 a share to nearly $500).
But it's also led to some glaring fundamental disconnects, the perfect example of which is Sundial Growers (SNDL -5.50%).
The Sundial rally has no substance
Canadian marijuana stock Sundial, which was primarily targeted by retail investors for its penny-stock share price, is up 482% over the trailing three months, as of this past weekend.
Investors could make the case that Sundial has skyrocketed on the hope of U.S. federal legalization. With Democrats in control of Congress and a record-high 68% of surveyed Americans favoring legalization in the latest Gallup poll, the prospect for that is greater than it's ever been.
Optimists could also argue that Sundial deserves a lift for improving its balance sheet and increasing its available cash to nearly $680 million -- taking into account both the Indiva investment and exercising of warrants within the past week.
But there's absolutely no way for even the biggest marijuana stock bulls to mask Sundial's rampant share-based dilution. Factoring in the 98.33 million warrants executed last week, Sundial has ballooned its outstanding share count by more than 1.1 billion since the end of September. And management isn't done. More warrants were granted last week, and the company filed a mixed-shelf offering that'll allow it to sell up to $1 billion in additional common stock over time.
Furthermore, Sundial isn't close to profitability, and its transition to the retail side of the market will ensure it remains deeply in the red for numerous quarters to come. In other words, it may be up nearly 500% in three months, but it's not a very good company.
Ignore Sundial: These growth stocks have the potential to deliver 500% gains
Instead of putting your money to work in an unproven penny stock, consider buying into innovative growth stocks that offer sustainable upside of 500%, if not greater. Here are three perfect examples.
Healthcare stocks offer a sea of game-changing innovation. Teladoc Health (TDOC -6.03%) just happens to be on the leading edge of that innovation when it comes to personalizing the care process and improving the service aspects of delivering and coordinating care.
Teladoc is a telemedicine giant. As you can imagine, the perfect storm of events occurred in 2020 to fuel growth. With physicians wanting to keep COVID-19 patients and high-risk people out of their offices, virtual visits became a go-to service. Teladoc's virtual visits are expected to have grown from 4.1 million in 2019 to 10.6 million in 2020.
The beauty of the telehealth model is that it improves efficiency or the experience up and down the healthcare treatment process. It's convenient for patients since they don't have to leave their homes. As for physicians, virtual checkups and consultations allow for improved treatment oversight and the ability to fit more patients into their busy schedules. Finally, insurers love it because it's billed at a lower cost than office visits. Telehealth is, unquestionably, the future of healthcare.
Teladoc also gets a feather in its cap for the purchase of Livongo Health, the leading company in applied health signals, in early November. Livongo gathers copious amounts of patient data and, with the help of artificial intelligence, sends its members tips and nudges to help them lead healthier lives. It's currently doing this for more than 500,000 diabetes members, but will soon be expanding its services to include hypertension and weight management.
With Teladoc and Livongo under the same umbrella, the possibilities for reshaping healthcare in the U.S. are endless. Expect this company to be one of the fastest-growing healthcare stocks this decade.
Marijuana is an exceptionally popular investment opportunity, if you couldn't tell by the euphoria surrounding Sundial, Tilray, and a handful of other pot stocks. Over the next decade, it probably ranks as one of the fastest-growing industries in North America. But Sundial isn't the marijuana stock you're going to want to own if you want sustainable 500% gains. Instead, go pick up shares of small-cap multistate operator (MSO) Jushi Holdings (JUSHF -2.56%).
To begin with the obvious, Jushi operates in the U.S., whereas Sundial is currently tied to the Canadian market. Even though cannabis is legal in our neighbor to the north, Canada has been plagued by federal and provincial supply issues and value-focused consumption that's crushed margins. State-level legalizations have proved much more lucrative for U.S. MSOs, and the market potential is many multiples larger.
What allows Jushi Holdings to shine is the company's unique approach to building up its retail presence. The three core states it's chosen to focus on are Pennsylvania, Illinois, and Virginia, all of which are limited-license states. In Pennsylvania and Illinois, there are limits on the number of dispensary licenses issued. Meanwhile, in Virginia, licenses are assigned by jurisdiction. What this means for Jushi is that competition in the markets it's chosen to operate in will be limited or nonexistent. That'll give it the opportunity to build up its brands and gobble up significant market share.
Jushi is also relatively inexpensive considering how quickly it's expected to grow. Most U.S. MSOs are going for multiples of up to 5 times their forecast sales in 2022 or 2023. By 2022, the company's sales should more than quadruple to $378 million, according to Wall Street's estimates. If Jushi simply uses its existing retail licenses and makes prudent acquisitions in limited-license markets, a 500% gain would be very doable.
Also, as I've previously pointed out, Jushi's executives and insiders have ample skin in the game. When insiders align their money with that of shareholders, usually everyone wins.
A third high-growth stock that offers substantially more upside than Sundial is Singapore-based Sea Limited (SE -7.49%). Even though Sea is up more than 400% over the trailing year, it's still just scratching the surface with regard to its long-term potential.
Sea has three operating segments, all of which offer sustainable triple-digit or high double-digit growth.
The segment currently generating most of the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) is gaming. Sea ended September with more than 572 million quarterly active users, 65.3 million of whom were paying customers. The interesting thing is that quarterly active paying users jumped to 11.4% of all active users in the third quarter of 2020 from just 9.1% in the prior-year period. Undoubtedly, the pandemic helped drive gaming interest. But these figures demonstrate that Sea's gaming arena is resonating with global users.
The second segment, which is what's expected to drive Sea's greatest growth potential, is its online marketplace known as Shopee. Though Sea has global ambitions, it's primarily targeting the burgeoning middle class of Southeast Asia. Gross orders on its Shopee platform surged 131% in the September-ended quarter from the prior-year period, with gross merchandise value traversing its network more than doubling to $9.3 billion. These are surface-scratching numbers for the company.
Finally, Sea offers digital financial services in a region that's considered by many to be underbanked. It ended September with 17.8 million paying customers using its mobile wallet services.
Sea's potential in e-commerce, gaming, and digital financial services could allow it to double sales every two years throughout the decade.