Much of the profit that investors in Sundial Growers (SNDL 2.19%) have made over the past year can likely be attributed to speculation and the stock becoming a popular buy on Reddit. That popularity has also improved the company's prospects, allowing it to raise cash multiple times and at prices that it otherwise wouldn't have been able to, putting it in a much stronger financial position today.
Sundial Growers is an underdog in the sector due to its small size and low sales numbers. And many investors dismiss it as nothing more than a meme stock. But as far as Canadian cannabis companies go, it might be the best one to invest in right now. Here's why.
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1. It has plenty of cash and minimal debt
One of the most important things for investors to consider when looking at marijuana companies is the strength of their financials, and specifically cash. That's one of Sundial's bright spots -- the company reported that it had an unrestricted cash balance as of May 7 that totaled 752.7 million Canadian dollars. The company has no debt, and its cash balance would be more than enough to pay off the CA$97.9 million in total liabilities (both short- and long-term) that it reported on its books as of March 31.
An important metric I like to consider is how long the cash will last at the company's current burn rate, because having lots of money doesn't mean a whole lot if you are wasting most of it. Over the past three months, Sundial spent CA$34.4 million in its day-to-day operating activities. At that rate, its cash balance could last for more than five years (assuming investing activities were kept to a minimum). By comparison, Aurora Cannabis's cash and cash equivalents of CA$470 million would be enough to last roughly a little more than a year and a half at its current monthly burn rate of more than CA$25.5 million.
2. It is diversifying its operations
Another thing I like about Sundial is that the company is taking advantage of its cash position, deploying it into opportunities that will make the business more diverse. In May, the company announced it was acquiring retail cannabis company Inner Spirit in a cash-and-stock deal worth CA$131 million. The move instantly gives the cannabis producer a strong retail presence; Inner Spirit has 86 locations across Canada, including both franchised and corporate-owned stores. Sundial also invested in an edibles company, Indiva, while also increasing its ownership in Valens, a cannabis extraction business.
But it's clear the company has investments as its main focus, recently increasing its investment in SunStream Bancorp from CA$188 million to CA$538 million. The joint venture, created with the SAF Group, is designed to look for cannabis-related investments. It has been by far Sundial's biggest move (financially) this year. One of the reasons investors have been bullish on the stock is that they know the company has been looking for deals; in its year-end results (released on March 17), the company said it is exploring opportunities for its capital and this may result in a transaction, including a merger.
3. It isn't overly aggressive and spreading itself out too thin
Although Sundial is exploring opportunities, it hasn't wasted its cash on a bad acquisition -- it's clear that management has been careful in its analysis of where to invest. A big reason why Sundial isn't as risky as Aurora or other Canadian pot stocks is that its operations are focused on the Alberta market. While the recent acquisitions will expand its presence, the company hasn't been overly aggressive in its pursuit of growth; it isn't focusing on a U.S. pot market that may be off-limits for years. That's an important consideration if it wants to keep its costs down, and it already appears to be paying off. Despite a 30% year-over-year decline in revenue for the period ending March 31, Sundial is coming off its first-ever adjusted EBITDA profit.
Among the best-run cannabis companies in North America is Trulieve. While it is a multistate operator, as of June 23 it had 91 locations across the U.S., 85 of which were in its home state of Florida. A focused strategy on one key market has allowed Trulieve to post profits while many companies in the industry have struggled to stay out of the red. Alberta is certainly no Florida, but by avoiding the temptation of being too aggressive to expand south of the border or in markets that will require significant resources to develop, Sundial is keeping its operations simple and keeping that cash burn down.
Is Sundial a buy today?
Sundial is one of the few Canadian pot stocks I would consider investing in today -- but that doesn't mean I would buy the stock right now. Its valuation is still inflated due to the Reddit-fueled excitement, and without a sizable correction, investors are probably better off waiting and perhaps investing in other growth stocks instead. Sundial is on my watch list, but unless there's a crash in its shares that sends it below the $0.70 price it reached earlier in the year, it's not a stock I would consider investing in just yet.
