Faced with rapidly plummeting revenues and a persistent loss-making marijuana business, cannabis producer Sundial Growers (NASDAQ:SNDL) has subsequently pivoted to an investing game that former industry giant Aurora Cannabis (NASDAQ:ACB) gave up on last year. Could fortunes be different for SNDL stock investors?
In a new business strategy that meme stock pundits believe could make SNDL evolve a little more into investing legend Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Sundial Growers is building out an investment portfolio that will constitute a key reporting segment of the pot company’s business.
Sundial Aims to Succeed at Aurora’s Abandoned Game
Sundial Growers is struggling to grow its cannabis business. SNDL stock investors witnessed a restructuring exercise in 2020 and saw the company report 55% weaker revenue for the quarter that ended in June. A 10% decline in sales volumes year-over-year, and a 50% drop in net selling prices to $1.69 CAD per gram combined to deliver an emphatic blow to Sundial’s earnings statement by mid-year this year.
In an effort to engineer growth and prosperity for the business, Sundial’s executives have opted to wear some investment portfolio manager hats as well.
The company is deploying some capital it amassed through dilutive equity raises early this year into investment operations — a new business line that already has a separately reported operating segment.
Interestingly though, fellow industry competitor Aurora Cannabis once created a similar actively managed investments portfolio. At one point in June 2018, ACB had a $334 million CAD ($270 million) long-term investments portfolio that had about 10 open or recently closed equity or debt positions in cannabis-related companies. This included a $132 million CAD ($107 million) balance in The Green Organic Dutchman (OTCMKTS: TGODF) stock and a $110 million CAD ($89 million) position on liquor and cannabis retailer Alcanna (OTCMKTS:LQSIF).
SNDL Stock Profile Changing With the Shift
<em>SNDL is building stock and debt investments just as Aurora Cannabis winds up. Chart courtesy of <a href=”https://TIKR.com/”>TIKR.com</a></em>
Much like Aurora, SNDL is investing in the cannabis industry. Its portfolio surpassed the $254 million CAD mark in June, and the company committed hundreds of millions more to its SunStream Bancorp, a joint venture with global alternative investments manager SAF Group.
As if deploying a similar strategy wasn’t enough, Sundial is acquiring Alcanna in a $346 million CAD transaction. Aurora sold off its remaining 23% interest in Alcanna for a paltry $27.6 million CAD in June 2020 after investing about $138 million CAD in building a 25% stake in the retailer. SNDL is snatching and internalizing a business that ACB couldn’t afford to keep.
Unfortunately for Aurora, the investment portfolio is all but gone now. Plummeting valuations for Canadian marijuana assets worsened the demise of ACB’s portfolio. Persistent cash flow challenges also forced management to liquidate holdings to finance operations.
Will Fortunes be Different for SNDL Stock Investors?
The relative performance of investment funds is significantly determined by their respective dates of inception. Analysts will call the fund’s inception its vintage year.
Aurora Cannabis’s stock and derivatives portfolio was deployed during a period of frothy valuations for anything and everything cannabis-related. One could safely say that ACB bought highly overvalued marijuana assets. Perhaps its vintage year wasn’t the best for a long-term investment strategy. However, the company still reported some impressive unrealized gains on its quarterly earnings for a while and realized a 50% internal rate of return on its TGOD stake.
In contrast, SNDL is building its portfolio in an environment where valuations for cannabis assets have somewhat cooled off. One may argue that Sundial has a better chance of building a successful long-term investments portfolio of marijuana-related financial assets. The portfolio’s vintage year gives it a potentially lower (and superior) cost basis. Good asset skills selection will be key in driving success for SNDL’s stocks and debentures investment portfolio.
Most noteworthy, Sundial has partnered with an experienced asset manager right at the onset. This is unlike Aurora Cannabis, which later internalized investment banking skills after already amassing a portfolio of 15 acquired subsidiaries and a similar number of strategic investments.
Investor Takeaway
Sundial Growers’ two-track business strategy isn’t entirely new to cannabis stock investors. They witnessed one similar strategy go belly-up not so long ago. It’s too early to judge if SNDL will manage investment portfolios better for its investors than ACB did, but vintage is in its favor. Managed well, the Sundial investments portfolio could produce significant returns for shareholders.
To be fair, though, it’s possible that Aurora executives didn’t intend to manage an investments portfolio forever. Perhaps the company only intended to make some money on the side and would liquidate portfolio holdings to finance its cash-hungry operations. In that case, Aurora Cannabis might not have entirely failed at the investing game: it just had different investment objectives to Sundial.
On the date of publication, Brian Paradza did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.