Cannabis stocks might be out of favor at the moment, but that just means there are more under-the-radar opportunities around for bargain-hunting investors. And SNDL (SNDL 2.93%), the Canadian cannabis, alcohol, and investment banking company formerly known as Sundial Growers, seems like it's starting to shape up to be one of those hidden gems.

The catch is that investors will probably need to wait a few years for a return, given the market's growing preference for profitable businesses in mature industries rather than newer players in emerging industries like marijuana. In light of that, here's what you need to know to decide whether SNDL is a good option for your portfolio.

The case for buying SNDL is getting stronger

SNDL will be a much more formidable company entering 2023 than it was in recent history, and its near-term growth trajectory is one of the biggest reasons to consider an investment. 

Thanks to the acquisition of Alcanna that closed in mid-2022, it's now the biggest private liquor distributor in Canada, and its trailing-12-month (TTM) revenue skyrocketed by more than 700% in the last three years, topping 494.5 million Canadian dollars. As a result, it now makes more than twice as much revenue from liquor than from marijuana, and its liquor segment is profitable as of Q3. Liquor sales are far more likely to remain stable than marijuana sales, as the alcohol industry is far more mature and experiences more predictable demand, so the pivot is also a significant de-risking of the stock. 

In sum, the first full quarter of the company's financial results that include the Alcanna acquisition makes the purchase look like it is the definition of being accretive to shareholder value. That's a big point in management's favor. But the company is still spending more money than it is making, and it's unclear for how much longer that will go on.

While it isn't profitable, its TTM cash outflow was a scant CA$37.3 million, which isn't at all concerning in light of its CA$988 million in liquid securities and long-term investments, CA$278 million of which is unrestricted cash. The business has its sights set on an acquisition of The Valens Company, a smaller Canadian cannabis operator, for CA$138 million in stock. But Valens is only the latest purchase in a year-long buying frenzy that has transformed the company. 

On Nov. 1, it closed its acquisition of Zenabis, a regional Canadian marijuana cultivator that brought in CA$11.1 million in Q2 of this year. Per the terms of the deal, SNDL picked up more than 22 million grams of cannabis inventory, not to mention a massive cultivation facility that's certified for exporting to the E.U. And both of those will enable it to spend less on growing fresh cannabis and setting up new facilities for a while. 

Its valuation probably won't be this low for long

SNDL's management is keen to continue with its purchasing spree, and the success of the Alcanna buyout will probably eventually get noticed by the market, driving its share price upward. Right now, the stock is priced attractively, though the announcement of other acquisitions (and the closing of the Valens purchase that's anticipated in Q1) could also change that quite rapidly. 

Here's how SNDL's valuation stacks up in comparison to competitors like Tilray Brands, Canopy Growth, Aurora Cannabis, and Cresco Labs:

SNDL PS Ratio Chart
Data by YCharts.

SNDL is among the most inexpensive of the pack based on its price-to-sales (P/S) and price-to-book (P/B) multiples. If you aren't familiar, basically that means you'll be getting a larger claim to the company's revenue as well as to its tangible assets than you might with a competitor. Another benefit of having a low valuation is that the stock is less exposed to the downside risk of shareholder flights to quality during market turbulence; investments with bloated valuations are typically among the first to get dumped when things start to look bearish. 

In particular, SNDL's P/B being less than 1 is a key factor in assessing the risk level of the stock, as it means there's enough value stored in the business's assets to fully repay shareholders for their shares (at their current price, at least) in the event of a bankruptcy. Of course, bankruptcies don't happen overnight, and there's no reason to think that SNDL's grand total of $0 in debt due within a year poses any threat to its solvency. The biggest risk moving forward is that it will likely need quite some time to become profitable.

Given that the company's valuation is ripe and its first major acquisition went quite well, SNDL could be a good addition to the risky section of your portfolio. If its cannabis operations were becoming more profitable over time instead of less, it'd be a screaming buy. But for now, there are probably safer places to park your cash for growth, though that could still change over the coming year.