Low-priced equities (usually defined as stocks with share prices under $5) are a favorite vehicle among risk-tolerant investors for a host of reasons. One of the most important reasons is that investors can buy a large number of shares with a small amount of capital. This strategy creates instant leverage for shareholders (potentially amplifying returns) in a manner similar to buying a call or a put option, without having to worry about the all-important problem of an expiration date. Companies with exceedingly low share prices, however, often have underlying fundamental problems or operate in a high-risk industry (e.g., clinical-stage biotechs). As such, these types of equities are inherently risky, making them suited for only the most aggressive of investors.
Despite the fact that legalized cannabis is one of the fastest-growing industries in the world right now, most publicly traded marijuana stocks have rarely been kind to their early shareholders. As a result, scores of marijuana stocks currently sport share prices well below $5. This subsection of the healthcare sector has suffered from the slow pace of legalization in key commercial territories like the U.S., overly aggressive management teams who have wasted immense amounts of capital on unnecessary facilities, and a thriving black market that typically offers consumers illicit products at far lower prices. One Canadian cannabis company, though, might have what it takes to overcome all these hurdles to deliver mind-boggling returns for its shareholders in the years to come.
Sundial Growers: A potential hidden gem in the high-value cannabis space
Since its initial public offering roughly two years ago, Sundial Growers' (SNDL -3.77%) stock has been one of the worst-performing in the entire cannabis space. In fact, the company's shares are down by an eye-popping 92.2% over this short time span. The main reason for Sundial's cringe-worthy performance since its debut as a public company is its penchant for diluting shareholders. At last count, the company's outstanding share count, on a fully diluted basis, has swelled by a whopping 160% over just the past two years. The upside to all this shareholder dilution is that Sundial has been able to raise a ton of capital for value-creating business development activities -- while also avoiding taking on boatloads of debt in the process (a problem that has plagued several of the company's closest peers).
What is Sundial doing to create value for long-term shareholders? Sundial has been making numerous moves over the past year in an attempt to achieve positive net income on a sustainable basis. To meet this key operating goal, the cannabis company's braintrust has moved into the liquor business through the a recent acquisition of Canada's largest private liquor retailer, Alcanna; boosted its commercial footprint by acquiring other cannabis retailers like Inner Spirit Holdings; plowed a healthy amount of capital into the investment side of its business via companies like SunStream Bancorp; and held a large amount of unrestricted cash in reserve, presumably in anticipation of an opportunity to expand into the massive U.S. cannabis market following federal legalization. Wall Street thus expects Sundial's top line to surge by 371% next year, thanks to these transformative business development moves.
What are the risks? First off, Sundial is still forecast to be cash-flow negative next year, despite this sizable upswing in its top line. Second, the company may continue to dilute shareholders at a frightening pace to keep its cash reserves on the high side in order to maintain its ability to do business development deals. Third, Sundial's shares are well below the $1 listing requirement for the Nasdaq Stock Market at the moment. The company, in turn, may have to execute a reverse split to boost its share price above the $1 threshold. Potential investors shouldn't shrug off these potential risks.
Is Sundial's stock worth the risk?
The cannabis industry is going through a lot of growing pains right now. So, at the end of the day, there will probably be only a few big winners within this high-growth space. The good news is that Sundial's business is now diverse enough to stand up against most, if not all, of these headwinds. The company's sizable cash position should also allow it to wait out the drawn out legalization process in the all-important American market. That being said, this low-priced cannabis stock could continue to head lower if management can't execute on its promise to achieve profitability within a reasonable time frame.
All things considered, Sundial's shares ought to be close to a sharp rebound. Management's intriguing business development moves over the last year have put the company on much firmer ground. What's more, Sundial is one of the Canadian cannabis companies with enough cash on hand to rapidly move into the U.S. market when the opportunity becomes available. Investors, however, arguably shouldn't buy into this growth story without a long-term mindset. This small-cap cannabis stock could take upward of a decade to produce truly impressive returns.