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Sundial: Is the New Investment Strategy the Path Forward? Analyst Weighs In

The North American cannabis industry is poised for massive growth. Marijuana use has become widespread amongst large swathes of the population, both medically and recreationally. Recent macro developments – or more specifically, a Democrat led Senate intent on moving forward with federal marijuana reform - have sent valuations across the sector higher.

Subsequently and somewhat puzzlingly, Sundial (SNDL) – perhaps one of the less impressive cannabis producers – has been one of this year’s star performers. Even taking into account the stock’s retreat from the mid-Feb highs, shares are still up by 157% year-to-date.

The surge has little to do with fundamentals, as displayed in the company’s latest quarterly statement. In a booming cannabis market, Sundial’s results were hardly impressive, with declining year-over-year revenue and an EBITDA loss of C$5.6 million.

Plus, going by the company’s recent actions, BMO analyst Tamy Chen thinks Sundial is having a bit of an identity crisis.

“In addition to its LP operations, SNDL is embarking on a new path of making strategic investments,” Chen explained. “We believe investors may have concerns about this deviation from a sole focus on the LP business as well as what the potential returns could be relative to the high cost of equity capital raised recently (~$700mm, tripling of shares o/s).”

As Chen notes, the capital raises have come at the expense of massive share dilution and it remains to be seen whether the new strategy pays off.

In recent months, Sundial has made a $52 million debt investment in Zenabis, another $22 million debt and equity investment in edibles company Indiva and has formed a JV with private equity firm SAF Group. Here, the company is expected to pour $100 million into a "special opportunities fund."

The company has said it has found in the global cannabis industry some “mispriced investment opportunities” that offer “attractive risk-adjusted returns.”

Chen remains skeptical about the new direction but notes that one plus from the massive capital raise is that the company has repaid all debt and boasts a current cash balance of $719 million.

The improved balance sheet is why Chen raised her SNDL price target from $0.4 to $0.45. However, the new target is still a painful 60% below the shares’ current price. Chen’s rating stays an Underperform (i.e. Sell). (To watch Chen’s track record, click here)

The BMO analyst’s bearish sentiment is no outlier; with 2 additional Sells and 1 Hold, the analyst consensus rates the stock a Moderate Sell. Going by the $0.74 average price target, the shares will be changing hands for a 50% discount a year from now. (See SNDL stock analysis on TipRanks)

To find good ideas for cannabis stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.