Ship part

Should SNDL investors jump ship after its stock split?

Oith stocks trading above $2 at the end of last month, investors in SNDL (NASDAQ: SNDL)formerly known as Sundial Growers, may have been buoyed by some good news that ultimately boosted the stock’s value.

But it turned out that a 1-for-10 reverse stock split was the reason for the price increase. It was a move the company needed to get its stock price back above $1 and thus remain listed on the Nasdaq.

SNDL shares relapse since the reverse split, and it’s now down more than 70% in the last 12 months (in comparison, the Horizons Marijuana Life Sciences ETFs decreased by more than 60%). Should investors sell the stock for good, or is it worth hanging on and waiting for a rally?

More reverse splits could be in SNDL’s future

On July 25, the company announced a special resolution that would allow it to consolidate its shares up to 1 for 25. The deadline for the consolidation is within a year, which means there could be more splits reversed (since so far it has only done a 1 in 10 consolidation) anytime until then.

This gives SNDL a buffer if the stock continues to fall. A reverse stock split is not good news for investors and serves only as a reminder of the poor performance of the stock. However, it might make management’s life easier if they had approval for an additional consolidation, rather than having to seek it out at another meeting.

Reverse divisions are not what matters

A reverse split does not mean a business is doomed or cannot recover. It is simply used to increase the price of a stock to keep it on a major exchange. It does not represent new information relative to the company as a whole and therefore should not affect buying decisions.

What investors should instead focus on are the company’s overall finances and chances of success. Admittedly, SNDL doesn’t fare too well in this area either, as its financial results have normally been deep in the red:

SNDL net income (quarterly). Data by Y charts.

For SNDL to be a game changer, its finances need to improve. The good news is that with the acquisition of liquor retailer Alcanna earlier this year, SNDL is sure to announce record figures in the next quarter. But that doesn’t mean that the cannabis business is doing well or that the whole business will become profitable; Alcanna suffered a net loss last year and may not necessarily improve SNDL’s results.

Investors will receive an update on the company’s development when SNDL releases its latest earnings figures, which are expected early this month.

There are few reasons to own the stock today

SNDL has been a chronic underperformer for years and has relied on acquisitions in recent times to transform its business. They will provide it with an easy way to generate growth this year, and investors should be sure to examine the performance of each business unit before making a decision whether or not to buy the casserole broth or not. And while the reverse split certainly did not make SNDL a worse of a purchase, it didn’t make it any better either.

Investors should be careful when assuming that SNDL’s stock price has bottomed out, as a bad stock can always go down. The advantage of selling the stock today is that at least you can get back what’s left of your investment, because at this point I wouldn’t be optimistic that a big turnaround is possible anytime soon.

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David Jagelsky has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.