Pot stocks, one of the hot trends of 2018, are back in fashion. So are stocks with low market capitalizations. So are stocks with high short interest. Sundial Growers (NASDAQ:SNDL) is all three of these things, and thus became a Reddit play. That is, small traders at the sub-Reddit r/WallStreetBets banded together and bought SNDL stock, along with out-of-the-money call options.
They liked that it was debt free. They liked a push by Democrats to declare pot legal nationwide.
And they didn’t even stop when Sundial sold even more stock, bringing the share count to 1.5 billion at the start of February. Shares that were worth 56 cents on Jan. 26 were worth almost $4 at the start of trade on Feb. 11.
If I were one of those lucky January holders, I’d call myself a lottery winner and cash out.
Why Sell
There are sound reasons to sell SNDL stock.
For one thing, there is significant pushback on legalization. The Idaho State Senate has passed a constitutional amendment against marijuana. Other states are pushing legalization to raise revenue, ignoring the fact that regulated sales can’t compete with Dealer McDope.
Senate Majority Leader Chuck Schumer needs 60 votes to overcome a filibuster. Even his bill’s supporters call that “a heavy lift.”
Then there’s the fact that Sundial is a small player in a big game. The company’s sales are still under $100 million, while the market cap is now $3.6 billion. There are scaled competitors like Canopy Growth (NYSE:CGC), backed by liquor giant Constellation Brands (NYSE:STZ), and Cronos (NASDAQ:CRON), backed by tobacco giant Altria (NYSE:MO).
None of this has stopped the Redditors. Sundial is now one of the top 10 buys on Robinhood, the “free” stock trading app that makes money on its order flow.
What Happens Next
I must tip my hat to Sundial’s management. They’re taking full advantage of the Redditors to raise money. It reminds me of the 19th century Erie War, but that was a battle for control over a real railroad. This is a pure cash grab.
Some of what’s happening smells of things other than marijuana. Our own Mark Hake wrote in January about a huge loan to Zenabis Global (OTCMKTS:ZBISF), another pot producer, which he concluded was highly likely to default.
Share values plunged after the latest capital raise but they have since come roaring back despite a lack of news. After falling from $1.25 to $1 on Feb. 4, SNDL stock closed at nearly $3 on Feb. 10 and rose another $1 overnight.
Writers have been unanimous in questioning the move. One wrote that the recent gains “should terrify” shareholders, because it’s not based on anything real. A Forbes contributor said it quite plainly: don’t buy.
I did find a bull case from our Craig Adeyanju, released when the stock was trading at $1.70 per share. He focused on the prospects for legalization, a relatively low price-to-sales ratio and the company’s cash raise. He said that could make it an attractive acquisition.
Maybe at $1.70. Not at $4.
The Bottom Line on SNDL Stock
When Gamestop (NYSE:GME) was trading at over $300 recently, TV analyst Jim Cramer called in from his sickbed to beg traders to sell. “You’ve won,” he said. Those who took the advice made money. Those who didn’t have lost billions.
You don’t have a profit until you sell an asset and have cash in your pocket. I had a huge paper gain in Bed Bath & Beyond (NASDAQ:BBBY) during its rise, but it only became a real gain when I sold my shares. I like the company, but you should never fall in love with your stocks.
If you have a profit in Sundial, take it. Even if you like the company — you’ll get another shot at it.
At the time of publication, Dana Blankenhorn held no shares, directly or indirectly, in any companies mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.