Cannabis Investment Club

[JohnCM]

This is the unquestioned worst pot stock you can buy

The Motley Fool
March 20th 20121

The point is, there are a lot of bad marijuana stocks -- but one stands head and shoulders above the pack. In my view, the absolute worst pot stock that money can buy is penny stock Sundial Growers (NASDAQ:SNDL).

Shares of Sundial, a Canadian licensed producer, are up about 1,000% since late October on three developments. First, there was the victory of Joe Biden in November and the subsequent retaking of the Senate by Democrats in early January. Democrats have a considerably more favorable view of cannabis than Republicans do, making it more likely that we see some sort of cannabis reform enacted at the federal level in the months or years to come. Sundial investors are crossing their fingers for U.S. legalization, which would allow all Canadian growers to enter the U.S. weed market.

Second, investors seem pleased with Sundial cleaning up its balance sheet. As of March 15, the company had 719 million in Canadian dollars (about $580 million) in unrestricted cash. This implies that Sundial has more than enough capital to execute on its growth initiatives.

And third, Sundial has benefited from being a core holding of the retail-investor-focused Reddit frenzy. It's consistently been one of the most short-sold stocks of 2021, making it a perceived candidate for a short squeeze among Reddit traders.

Though all three of these factors explain why Sundial Growers has tacked on a quadruple-digit gain in six months, they don't come close to justifying the move.

Before Sundial, I thought Aurora Cannabis was one of the worst serial diluters I'd ever seen, but Sundial takes the cake. Although I'm still waiting for the company's official share count via its annual report filing in Canada at the time of this writing, I'd estimate that, following the exercising of 98.3 million warrants last month, Sundial has at least 1.66 billion shares outstanding. This implies the company increased its outstanding share count by over 1.15 billion shares in roughly five months. I know its CA$719 million cash figure looks attractive, but understand that it's been built by burying its most faithful followers under an avalanche of new stock.

With such overwhelming dilution, here are two things to consider. First, if and when Sundial does turn the corner to profitability, it's going to need to generate CA$17 million in profit (about $13.7 million ) just to produce a single penny in earnings per share. Considering that the company yielded only CA$60.9 million in net sales ($49.1 million) last year, it's highly unlikely that we're ever going to see a meaningful per-share profit from Sundial.

Second, with the company also having a $1 billion mixed shelf offering at its disposal, this dilution is almost assured to continue. The thing to realize is that share price is irrelevant and market cap is what matters. At the moment, we're looking at a company with a $2.6 billion (that's U.S.) market cap that didn't even generate $50 million in net sales last year. Sure, it may have a share price that's perceived to be low. But investors are paying roughly $2 billion (sans cash) for a company that's nowhere near profitable, saw net sales go in reverse in 2020, and continues to dilute its shareholders. In other words, Sundial is a good candidate to once again dip well below the $1 minimum share price required for continued listing on the Nasdaq exchange.

Emotions from young retail investors appear to be the only thing keeping Sundial Growers' stock above $1. If investors were to really dig into this company's operating performance and balance sheet, I'm convinced they'd come to the same conclusion: Sundial is the absolute worst marijuana stock your money can buy.