Reddit users have shone a spotlight on several stocks that have skyrocketed. You can put health insurer Clover Health Investments (CLOV 0.84%) and cannabis operator Sundial Growers (SNDL 1.09%) squarely on the list.
Shares of Clover Health soared close to 190% in June before giving up most of the gains. Sundial Growers vaulted more than 520% year to date by early February. Even after a significant decline from this peak, the Canadian marijuana stock is still up more than 90% for the year.
Which of these Reddit stocks is the better pick for long-term investors? Here's how Clover Health and Sundial Growers stack up against each other.
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Financial strength
Neither Clover Health nor Sundial is profitable at this point. Clover posted a net loss of $48.4 million in the first quarter of 2021. Sundial's Q1 net loss totaled 134.4 million Canadian dollars (in the ballpark of $107 million U.S. dollars).
Clover Health's revenue is growing at a solid pace, though. That's not the case for Sundial. In the first quarter, Clover's revenue jumped 21% year over year to $200.3 million. Sundial's Q1 net revenue fell 29% to CA$9.9 million.
Both companies are sitting atop hefty cash stockpiles. Clover's cash, cash equivalents, and short-term investments totaled $683.6 million as of March 31, 2021. Sundial had cash, cash equivalents, and marketable securities of CA$907 million (around US$723 million) as of the same date. Debt isn't a problem for either Clover Health or Sundial Growers.
Growth prospects
Clover Health's primary focus thus far has been on the Medicare Advantage market. It's the fastest-growing Medicare Advantage plan provider in the U.S. The company should be able to grow in this arena by attracting new members in the areas where it currently operates as well as by expanding into new markets. It recently announced plans to offer Medicare Advantage plans in 101 additional counties -- nearly doubling its current geographical footprint.
The company is also now targeting the original Medicare market. Clover has kicked off a Medicare Direct Contracting program that it thinks will bring in between 70,000 and 100,000 beneficiaries by the end of this year. By comparison, the company expects close to 70,000 Medicare Advantage members by year-end.
Clover Health believes that its technology gives it a key competitive advantage by lowering overall healthcare costs. It thinks that over time it will be able to enter every Medicare Advantage market in the country. Clover also foresees opportunities to expand into Medicaid and commercial insurance down the road.
Sundial Growers competes in the Canadian cannabis market. This market has experienced headwinds due to pricing pressures, a lacking retail infrastructure, and COVID-19. However, Sundial anticipates that its improved cultivation operations and shift to higher-margin products will enable it to be successful in this market.
The company could have an even bigger opportunity with its investments. Sundial formed a joint venture with SAF Group to invest in other cannabis businesses via debt, equity, and hybrid deals. So far, it has committed CA$538 million to this joint venture.
There's also a big wild card for Sundial -- the possibility of major federal cannabis reform in the U.S. Sundial would likely focus heavily on the U.S. market if laws are changed so that it could do so while retaining its listing on the Nasdaq stock exchange.
Valuation
We have to use sales-based valuation metrics with these stocks since neither company is profitable yet. Clover Health's shares trade at 4.5 times sales. Sundial's price-to-sales multiple currently stands at 10.7.
Better Reddit stock?
Clover Health appears to have a stronger overall financial position than Sundial with its continued revenue growth. It also has better growth prospects for now, although that could possibly change if Sundial has an opening to enter the U.S. cannabis market. Clover's valuation is also more attractive than Sundial's.
With Clover Health winning in all three categories, my view is that it's the better Reddit stock for long-term investors. Having said that, though, I don't think that Clover Health is a great stock to buy right now.
The company recently warned investors that its share price could fall because of high levels of volatility. Clover acknowledged that it could have been a target of a short squeeze in recent weeks.
It's possible that the stock could skyrocket if another short squeeze occurs, but any gains would be only temporary. My view is that most investors are better off staying on the sidelines until the dust settles.
