When it comes to ranking the oddballs of pot stocks, Sundial Growers (SNDL 2.73%) and Village Farms International (VFF 6.91%) should both be high on the list. While both companies grow and distribute cannabis, they each derive a significant amount of revenue from other activities entirely.
That might make them more appealing to investors who eschew pure-play marijuana operators, but it also introduces new risks that investors need to know about. Let's take a look at a pair of perspectives to get a better idea about whether one of these stocks might be fit for your portfolio.
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The case for Sundial Growers
Jim Halley (Sundial Growers): Sundial Growers has been a meme-stock favorite this year and that's not necessarily a bad thing. The stock is up more than 15% year to date. The Canadian cannabis company has lost money since its initial public offering in 2019, but may now be turning things around with nine months of positive adjusted EBITDA.
The company paid off its long-term debt at the end of last year and in the third quarter, posted positive adjusted EBITDA of 10.5 million Canadian dollars, up from CA$4.4 million in the same quarter a year ago. Sundial also reported a positive net income of CA$11.3 million in the third quarter. The company said it had net revenue from cannabis segments of CA$14.4 million in the quarter, up 57% sequentially and 12% year over year. Its cash position, long a problem because of the company's burn rate, is in a better place now with CA$571 million at the start of November, up from only CA$60.3 million on Dec. 31, 2020.
I'm not saying there isn't plenty of risk with the cannabis stock. It has been trading under $1 a share since June, putting the company in danger of being de-listed on the Nasdaq. On top of that, it still has to prove that its improved third-quarter numbers aren't an aberration.
Sundial is betting that its CA$346 million October purchase of Canadian liquor retail company Alcanna and Nova Cannabis will help with its cash flow, in addition to making the company's revenue streams more diverse. Alcanna, with its 171 stores, produced CA$16.4 million of free cash flow over the past year and its business could be used in the future to help promote the company's cannabis business as well. Nova came as part of the deal and its 71 retail outlets, combined with Sundial's purchase in June of Inner Spirit Holdings, gives Sundial a total of 181 retail outlets in Canada, making it the largest multi-province operator in the country.
Sundial also recently announced a stock buyback, which may help make up for its recent history of stock dilution. As a long-term play, its hard not to see Sundial's potential, despite its current struggles.
The case for Village Farms
Alex Carchidi (Village Farms): Village Farms isn't a typical cannabis company because most cannabis companies don't make the majority of their money by selling vegetables.
But thanks to its produce segment that sells tomatoes and peppers across North America, it has distribution networks in place that could eventually help it break into the U.S. cannabis market. And its indoor cultivation know-how built from years of tomato farming means that it has a huge amount of institutional knowledge, much of which could carry over into cannabis. That might well give it an edge over its cannabis pure-play competitors.
For now, the business is the market leader in sales of dried cannabis flower across a trio of Canada's provinces. It's also increasing its footprint in Canada by acquiring local operators like Rose LifeScience, which it bought 70% of in mid-November for CA$46.7 million in cash and stock. In the future, Village Farms plans to target the E.U.'s medicinal cannabis market.
Regarding its financial performance, Village Farms is narrowly unprofitable, but it can likely change that by as soon as next quarter. Over the last year, as percentages of quarterly revenue, its cost of goods sold (COGS) and its total operating expenses have fallen by 22.79% and 12.89%, respectively. At the same time, its quarterly revenue grew by 52.95%.
So expenses are falling, unit economics are improving, and income is rising. And as the market's price level for its vegetables recovers from some of the distortions of the early pandemic, it'll see higher margins in its largest business segment. In all, that means the next year will be a great one for Village Farms, and probably for its investors too.
Which company will succeed in making a turnaround?
Both of these companies are risky because they're turnaround plays, and neither has a great track record for delivering for their shareholders. There's no guarantee that either will reach profitability and go on to have strong share price performance, though it's true that their recent results look favorable.
Still, each company has something unique to offer. If you prefer a more diversified business that won't be as affected by changes to marijuana policy, Village Farms is the safer pick. In contrast, Sundial's investment operations could end up providing significantly more growth over time despite the risk of concentrating in cannabis. If you're feeling daring, it might even make sense to invest in both.
