Meme stocks can make for attractive investments because they have the potential to skyrocket in value if there's some positive news surrounding the company or the industry that they're in. In some cases, they don't even require anything but a little momentum to get their shares moving upward.
Two meme stocks that have been popular buys this year are Clover Health Investments (CLOV -2.11%) and Sundial Growers (SNDL 0.54%). The former had a recent spike in price, while the latter was up more than 500% in February before cooling off. Below, I'll look at which of these two stocks could be a better buy in terms of both potential returns and overall safety.
Image source: Getty Images.
Clover Health has been doing better lately, but will that trend continue?
In the past month, shares of Clover Health have doubled while the S&P 500 has risen by just 3%. Sundial has been doing well, but its gains of about 50% haven't been as impressive as the healthcare stock's.
It's difficult to identify any particular catalyst for Clover's recent surge. The biggest news release coming from the company of late was its first-quarter earnings report, released May 17. And while the business posted some good numbers, with sales of $200 million for the period ending March 31 growing 21% year over year, the results weren't what pushed the stock upward. Growth of 18% in Medicare Advantage membership numbers this past quarter is solid, but it isn't exactly the type of news sends investors rushing out to load up on a stock. They're good numbers -- but not that good.
That puts the stock's recent bullishness into question, suggesting that it could just be a quick surge due to speculative buyers. Analysts from CNBC found that Reddit stocks can usually ride the hype for about nine days (on average) before there's a big drop-off in price. And Clover Health investors have already started to see that happen, as the stock has fallen sharply from highs of more than $28 earlier this month to finish last week at just above $15.
Sundial Growers has also been doing well this year, peaking back in February when it climbed to nearly $4. However, there's arguably even less reason to be excited about Sundial, as the company is not growing its sales at all. For the first three months of 2021, its revenue was down 29% year over year and 30% from the previous quarter. To its credit, the company's management says it is in the midst of a transition, moving from wholesale to branded retail sales. The wildcard in its favor is that investors know the cannabis company is on the hunt for deals; since February, it has announced investments in cannabis producer Indiva, launched a joint venture with SunStream Bancorp to seek out further opportunities, acquired Inner Spirit Holdings, and increased its ownership in Valens.
There's nothing like a possible acquisition to could get growth investors and speculators bullish on a stock. And although neither Clover nor Sundial looks terribly exciting from a growth perspective, Sundial has more potential to generate bullishness, especially given that it's in a hotter industry.
Which stock is safer?
Both of these businesses are incurring losses, and neither is a blue-chip investment you can just buy and hold without checking in on regularly. I'd argue the most important number to look at for meme stocks isn't profitability but instead their respective cash burn. That's because if the cash burn is high, it increases the likelihood that a company will need to issue shares to fund its day-to-day operations, leading to a decline in the share price and hurting your overall returns.
In the most recent trailing 12 months, Sundial has burned through 78 million Canadian dollars. That is a little more than 10% of the CA$753 million of unrestricted cash it reported on May 7. By comparison, Clover Health used up $93 million in just its past three months, which is 23% of the $405 million in cash and cash equivalents it had as of the end of the period. Clover Health is burning through more money during a shorter time frame, and that could lead to problems down the road.
It was also the target of a short-seller report from Hindenburg Research in February that sent its shares plummeting. Having the stock on the radar of short-sellers definitely adds to the risk for Clover Health investors.
Sundial is the stock I'd go with
Sundial is a bit of safer stock, but I also see a lot more potential for it to rise in value. Between growing excitement about federal marijuana legislation in the U.S. and potential deals and acquisitions drawing in even more bullishness, Sundial looks to have more potential over the long haul to produce better returns. While it's certainly had its share of struggles, everyone loves a good comeback story. And if it lands a promising acquisition, Sundial could turn its operations around.
Even though Clover Health's business has been growing, the medical insurer is in a lower-growth sector overall, and that could make all the difference for investors.
Whether it's stability you're after or just better long-term returns, Sundial is the better meme stock to buy today.
