In my last article on Sundial producers (NASDAQ:SNDL) stock, I discussed that Sundial was more reasonably priced than it first appeared.
Maybe not in terms of market capitalization compared to its profitability. But with its share price not much higher than its tangible book value per share? At current prices, this appears to be a low downside, high upside opportunity.
That said, thinking about the situation, there is something that could put additional downward pressure on SNDL shares: a reverse stock split.
It is something the company is likely to execute in order to stay listed on the Nasdaq exchange. Based on similar situations, this could result in another big sell-off for the Canada-based cannabis game.
However, if another selloff occurs, it could push SNDL shares into high-value territory. Not only that, there is still a chance that his recent trades will pay off. Given these factors, a decline in the value of market territory for equities could make this a not-to-be-missed, albeit risky, opportunity.
SNDL action and possible reverse splitting
Trading at less than $1 per share for some time, delisting risk looms over Sundial Growers. Recently, the Nasdaq gave it an additional 180 days to comply with the exchange’s minimum bid price requirements.
In other words, by August 8, SNDL shares must trade above $1 per share for 10 consecutive trading days. It could achieve this by taking the stock (at around 66 cents today) to that level. Or, the company could decide to proceed with a stock split instead, say, on a 10-to-1 basis. Shareholders would receive one new share for every 10 existing shares currently held. This would, in theory, change its stock price by 66 cents to $6.60.
If he chooses to go this route, there are positives and negatives. On the pro side, Sundial would retain its main listing on the market. Otherwise, it would likely move to the over-the-counter (OTC) market. A switch to the OTC market could limit access to the SNDL share, leading to a drop in its valuation.
On the other hand, a drop in the stock may be unavoidable, as reverse stock splits in general can put downward pressure on a stock.
Why? Many holders of the stock may be doing this, mistakenly thinking that its low absolute price means a big upside. Although I believe the stock has high upside potential, these types of investors/traders may sell after a reverse split anyway, believing that the potential to “get rich” with the stock is diminished. Also, an exit from penny stock levels will make the stock much easier to sell.
From value to deep value
At current prices, I think SNDL stock is a value play. Certainly not a game of value in the Graham-and-Dodd sense. Still in the red, it’s not cheap on a price-earnings (P/E) basis. Trading at a premium (albeit slight) to its tangible book value, the lack of a discount also makes the appeal of a value stock a bit over the top.
But a reverse split could change all that. Whether due to retail traders cashing in if it ceases to be a penny stock, or short sellers betting against it due to perceived uncertainty over its outlook, it could lead to another percentage drop. double digits of Sundial shares.
This would send the price well below its tangible book value. Today, SNDL stock is trading at 1.17 times its tangible book value. If it drops 30% from here after a potential split, it would fall to just 0.82x of the tangible, or an 18% discount. A 40% decline would push the stock to a 30% discount on a tangible pound.
Of course, it would make sense if the shares could move to a price that discounts the value of Sundial’s cash, investments and other more liquid assets. Much of the company’s capital is now tied to debt investments it has made in other pot companies. While paying a high rate of interest, the risk of default on these loans is also high. It is also not certain that the Alcanna (OTCMKTS:LQSIF) will provide the improvements in profitability that many (including myself) expect it to provide.
As I’ve said before, the potential of its M&A (M&A) strategy, as well as its debt investment unit, could see the company pot, while struggling to make its core business profitable. , become more interesting as a company than the market appreciates it today.
Even then, a likely reverse stock split could lead to another sharp drop in the stock. Another dip could make this a real deep value play. If a reverse split occurs and there is a decline after the split, you want to consider diving into the SNDL stock.
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At the date of publication, Thomas Niel has not held (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Thomas Niel, contributor for InvestorPlace.comhas been writing individual stock analyzes for online publications since 2016.