Dollar-cost averaging can help minimize the risk and decision-making anxiety when investing in stocks. Rather than investing all of your money into a stock at once or trying to time the market, you can spread out your purchases over the course of several months -- or even years. Over the long haul, assuming you've picked a good investment, you could come out with significantly boosted earnings by buying shares of a stock at various price points.
But how well would this strategy work for a meme stock like Sundial Growers (SNDL -3.38%) that has been fairly volatile this year? Below, I'll look at the returns you would have made from using dollar-cost averaging with the popular pot stock versus just making one large investment.
Image source: Getty Images.
Here's how much you could have made from Sundial Growers this year by making just one purchase
Year to date, shares of Sundial are up 90% -- well above the 31% returns that the Horizons Marijuana Life Sciences ETF has generated during that period. If you had invested $6,000 in the stock on Jan. 4 and bought it near its closing price of $0.55, your investment as of the end of June would be worth more than $10,353. But if you'd waited until Feb. 1 and bought it at $1.21, then your investment would only be worth $4,706, putting you well into the red.
The stock started gaining momentum with retail investors in February, though there wasn't a whole lot of reason for the sudden bullishness -- the only noteworthy development leading into its surge in price was news that it was launching new derivative products. That's hardly enough to send a stock soaring -- especially one that has had a difficult time generating much growth. At that point in time, its most recent results were for the period ending Sept. 30, showing sales that were down more than 50% from the prior-year period. But with meme stocks, investors aren't all that concerned with lagging sales numbers -- and they love a good underdog.
This is how much you could have earned with dollar-cost averaging
If instead of investing $6,000 at one point, you decided to invest chunks of $1,000 in each of the first six months of the year, this is how your average price would look (assuming you bought at the start of every month):
Chart by author. Source: Yahoo! Finance.
By June 1, your running average would be $0.92, just a few cents below the $0.95 that Sundial's stock was worth at the end of the month. That would give you a profit of around $170 -- far less than the $4,350-plus you would have earned if you'd made a lump-sum purchase at the start of the year. And, without the benefit of locking in that low price in January, your returns would look even worse by averaging your investment. Without that purchase -- i.e., if you'd only bought since February -- your running average would be $1.07, resulting in a $555 loss on your investment.
The bottom line here is that given the unpredictability of meme stocks, dollar-cost averaging won't necessarily help you avoid a loss. This strategy is better suited for investments that over long stretches are likely to rise in value, such as exchange-traded funds that mirror the S&P 500 or other safe investments. With meme stocks, where they go is anyone's guess, and that can make it hard to devise a strategy that can keep your money safe. Sundial has an uncertain future ahead and would not be a good option to deploy dollar-cost averaging on.
Are you better off just making one large purchase of Sundial?
At $0.90 as of the end of last week, Sundial isn't trading anywhere near its 52-week high of $3.96 nor its low of $0.138. And its trading volume for the last week of June was at about 100 million -- far less than the nearly 3 million shares that traded hands the day it reached its high on Feb. 11. What this tells me is that there isn't as much excitement (or speculation) surrounding the stock today. If you are expecting this meme stock to benefit from a surge in popularity, there are no signs that will happen anytime soon -- and that's not a great reason to invest in the stock anyway.
Today, Sundial trades at an obscene 14 times its revenue; that's more than investors are paying for top multistate operator and cannabis giant Curaleaf, which is at a price-to-sales multiple of less than 11. Given the inflated value of the markets right now, with Sundial being no exception to that, you will be taking on significant risk by buying shares of this troubled cannabis company right now. And that's true whether you invest in the stock today or spread out your investment over several months. Although your returns may vary, there isn't a safe strategy you can deploy when it comes to investing in Sundial or any other meme stock. You are better off avoiding the stock and instead investing in growth stocks that are more likely to make you richer.
