A stock split doesn't do anything to your investment besides changing the number of shares you own. Your overall investment dollars remain unchanged by a split. It's a discretionary move, and while some businesses, including Berkshire Hathaway, like keeping their share prices high, others like to split their stocks to bring down their prices so they look more affordable to retail investors.
When a stock is struggling, however, a company may deploy a reverse stock split where it takes investors' shares and gives them fewer shares in return. While this again won't change your overall investment, it can be a bad sign that the stock is struggling. Two cannabis stocks that may potentially take on such moves in the near future are Sundial Growers (SNDL -2.54%) and Hexo (HEXO).
1. Sundial Growers
It's looking inevitable that Sundial Growers will need to use a reverse stock split to stay on the Nasdaq. The company received a warning from the exchange last year that its share price has fallen below $1 -- a threshold it needs to stay above in order to remain on the exchange. This isn't new territory for the company, and it was in danger of this last year as well, but meme hype and excitement from retail investors sent shares of the stock surging to nearly $4, alleviating the concerns.
This time around, there is no meme hype helping the stock turn its fortunes around. Feb. 7 was the deadline by which the stock needed to regain compliance. This week, the company announced that the Nasdaq granted it an extension, which would give it until Aug. 8 to satisfy the exchange's minimum bid price requirement. But with Sundial's shares trading at less than $0.60, it has a long way to go in getting to $1, and a reverse split may still end up happening this year.
In May 2020, rival producer Aurora Cannabis used a reverse 12-for-1 stock split to inflate its share price and remain listed on the NYSE (today, it too is on the Nasdaq). Such a significant reverse split has allowed Aurora to remain well above $1 today, even though its stock has tanked by 67% over the past year. That is more than Sundial's decline of 55%. The question for Sundial may just be a matter of what its split ratio looks like.
For investors, it won't make Sundial more or less riskier than it is today. The company, which has incurred losses of 239 million Canadian dollars over the trailing 12 months and that has been acquiring retail cannabis businesses of late still has a long, uncertain path forward. And the problem is that with a price-to-sales multiple of 21, it could continue to decline further even after a reverse split; Aurora trades at just over four times its revenue and is much cheaper stock by comparison.
Hexo received a warning letter from the Nasdaq just last month, so it still has plenty of time to regain compliance -- 180 calendar days, with a deadline of July 25 (which may be extended). If it can stay above $1 for 10 straight trading days before that date comes, it will be fine. At around $0.65, Hexo's stock is closer to the $1 price today than Sundial's is. However, getting to that price point would still require a more than 50% jump from where it is today. Without some significant earnings surprise or development in the cannabis industry that sends all pot stocks soaring, it may be too high of a hill for Hexo to climb.
The company previously deployed a reverse split in December 2020, when for every four shares it took from investors, it gave just one back. Had the company been more aggressive with its reverse split, like Aurora with its 12-for-1 trade, Hexo wouldn't be looking at the prospect of doing another one now. But regardless of what multiplier is used, the problem remains the same: a falling share price. Hexo's stock has declined a mammoth 92% in just 12 months. And in October 2021, to add to the bearishness, the company's auditors raised concerns that Hexo, "did not maintain, in all material respects, effective internal control over financial reporting," and expressed doubts about the business's future.
Like Sundial, Hexo has struggled to stay out of the red; its losses over the trailing 12 months total CA$228 million. The difference is that Hexo wasn't a meme stock last year like Sundial that benefited from an inflated price, allowing it to raise money, cashing in from the high valuation. Hexo had cash and cash equivalents totaling CA$56 million as of the end of October 2021 (Sundial has more than 10 times that amount). That puts it in tough shape, as it has burned through CA$93 million in the last 12 months just from its day-to-day operations. More share offerings are likely in its future, and unless it can turn things around with some drastically improved results, another reverse split may be in the cards for Hexo as well.
Although that won't make the business any riskier, if it happens, it will indicate that Hexo's prospects haven't significantly improved from where they are today.