It was a year ago that meme stocks took off in popularity. Cannabis producer Sundial Growers (SNDL 3.08%) reached a peak price of $3.96 in February 2021, three times the price it was trading at a year earlier. But fast forward to today, and its share price is well below $1.

There has been significant volatility over the past year in meme stocks. Shares of both Sundial and AMC Entertainment Holdings (AMC 3.96%) have gone on wild rides. Below, I'll look at whether deploying a strategy of dollar-cost averaging would have been a safer way of investing in these types of stocks.

SNDL Chart

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1. Sundial Growers

At roughly $0.50, Sundial Growers is now trading around where it was at the end of 2020 and just before all the meme hype began. If you had bought $100 worth of Sundial's shares at the start of each month for the past year, this is how your holdings would look as of Jan. 3:

Date Stock Price Investment Shares Cumulative Investment Cumulative Shares Running Average
Feb. 1, 2021  $1.21 $100 82.64 $100 82.64 $1.21
March 1, 2021  $1.35 $100 74.07 $200 156.72 $1.28
April 1, 2021  $1.10 $100 90.91 $300 247.63 $1.21
May 3, 2021  $0.83 $100 120.77 $400 368.4 $1.09
June 1, 2021  $1.00 $100 100 $500 468.4 $1.07
July 1, 2021  $0.92 $100 108.7 $600 577.1 $1.04
Aug. 2, 2021  $0.82 $100 122.7 $700 699.8 $1.00
Sept. 1, 2021  $0.77 $100 130.04 $800 829.83 $0.96
Oct. 1, 2021  $0.67 $100 149.25 $900 979.09 $0.92
Nov. 1, 2021  $0.66 $100 152.21 $1,000 1,131.30 $0.88
Dec. 1, 2021  $0.57 $100 176.68 $1,100 1,307.97 $0.84
Jan. 3, 2022  $0.62 $100 161.55 $1,200 1,469.52 $0.82

Data source: Yahoo! Finance.

By dollar-cost averaging, you would have brought your average cost down to $0.82 per share by Jan. 3. However, with shares of Sundial dropping to just $0.62 by that time, you would still be deep in the red. At that price, your investment would have been worth approximately $911, nearly $300 less than your cumulative investment of $1,200. And with the stock continuing to decline since then, your losses would be greater today.

However, if you're optimistic that Sundial Growers is more than just a meme stock and is a legitimate threat in the cannabis industry, this could be a strategy that pays off. The problem is the business hasn't demonstrated that just yet. Over the trailing 12 months, Sundial has reported revenue of 47 million Canadian dollars, with its net losses of CA$239 million during that time being more than five times that amount.

The company is expanding via acquisitions into the cannabis retail market but whether that pays off is uncertain. For short-term investors, dollar-cost averaging with this pot stock likely wouldn't have helped given its sharp and consistent decline in price. With an average cost of $0.82, the stock would need to rise more than 65% from where it is now just to hit breakeven if you had used dollar-cost averaging. For longer-term investors, there's still potential for the stock to pay off, but this is far from a risk-free investment. 

2. AMC Entertainment

AMC has fared a bit better than Sundial Growers and its shares are still up when compared to a year ago. In this situation, dollar-cost averaging would result in an average that has increased over time:

Date Stock Price Investment Shares Cumulative Investment Cumulative Shares Running Average
Feb. 1, 2021  $13.30 $100 7.52 $100 7.52 $13.30
March 1, 2021  $9.18 $100 10.89 $200 18.41 $10.86
April 1, 2021  $9.36 $100 10.68 $300 29.1 $10.31
May 3, 2021  $9.71 $100 10.3 $400 39.39 $10.15
June 1, 2021  $32.04 $100 3.12 $500 42.52 $11.76
July 1, 2021  $54.22 $100 1.84 $600 44.36 $13.53
Aug. 2, 2021  $35.20 100 2.84 $700 47.2 $14.83
Sept. 1, 2021  $43.69 $100 2.29 $800 49.49 $16.16
Oct. 1, 2021  $38.46 $100 2.6 $900 52.09 $17.28
Nov. 1, 2021  $37.07 $100 2.7 $1,000 54.79 $18.25
Dec. 1, 2021  $28.57 $100 3.5 $1,100 58.29 $18.87
Jan. 3, 2022  $26.52 $100 3.77 $1,200 62.06 $19.34

Data source: Yahoo! Finance. 

The benefit here is that although the share price jumped significantly in the summer months last year, the average price didn't rise nearly as much. And that's the big advantage with dollar-cost averaging -- it can ensure that your price movements are more gradual over time.

Using this strategy with AMC would have left you with a profit as of Jan. 3. On that day, the stock closed at $26.52 -- 37% higher than what your average cost would have been at that point: $19.34. Unfortunately, with a steep sell-off last month the stock is now below that average. With dollar-cost averaging, you would still be in a better position than if you bought shares during the peak summer months, but not if you bought it a year ago when it was starting to rise in popularity.

Like with Sundial Growers, there's still plenty of risk with AMC. Not only has the movie theater operator incurred losses of more than $2 billion over the 12-month period ending Sept. 30, 2021, but it has also burned through more than $1 billion in cash during that time. However, the company is showing signs of improvement as it pre-released its fourth-quarter numbers this month, which showed that it generated positive cash flow totaling $216.5 million during the last three months of 2021.

Three people shaking hands while holding documents.

Image source: Getty Images.

Dollar-cost averaging is ideal for safe, long-term buys

For volatile investments, there's only so much dollar-cost averaging can do for you, since it can be difficult to predict where a stock will be from one month to the next. The strategy would have been a profitable one for AMC at the start of the year, but that's also because the stock was still a popular one with retail investors. Sundial Growers, however, hasn't generated nearly as much excitement of late and its falling share price has led to more disastrous results for investors.

Dollar-cost averaging is a useful tool when you're investing in the long haul in stocks that you are confident will rise in value over the years. For meme stocks, it can suppress some volatility, but it won't eliminate the risk.