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Should SNDL Investors Jump Ship After Its Reverse Stock Split?

With shares trading at more than $2 late last month, investors of SNDL (NASDAQ: SNDL), formerly known as Sundial Growers, may have gotten excited that there was some great news that finally lifted the stock up in value.

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

Shares of SNDL have been falling again since the reverse split, and it’s now down more than 70% over the past 12 months (by comparison, the Horizons Marijuana Life Sciences ETF has declined over 60%). Should investors sell the stock for good, or is it worth hanging on to and waiting for a recovery?

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 by as much as 1-for-25. The deadline for the consolidation is within a year, which means that there could be more reverse splits (since thus far it has only done a 1-for-10 consolidation) anytime between now and then.

It gives SNDL a buffer should the stock continue falling. A reverse stock split isn’t good news for investors and only serves as a reminder of the stock’s poor performance. However, it could make life easier for management if it has approval for more consolidation, rather than having to seek it out at another meeting.

Reverse splits aren’t what matter

A reverse split doesn’t mean that a company is destined for failure or that it can’t recover. It’s just normally used to pump up a stock’s price to keep it on a major stock exchange. It doesn’t represent new information with respect to the business as a whole, and thus it shouldn’t affect buying decisions. 

What investors should focus on instead is the company’s overall financials and the likelihood of success. Admittedly, SNDL doesn’t fare too well in this area, either, as its bottom line has normally been deep in the red:

SNDL net income (quarterly). Data by YCharts.

For SNDL to turn things around, its financials need to improve. The good news is that with the acquisition of liquor retailer Alcanna earlier this year, SNDL is sure to report record numbers in its next quarter. But that doesn’t mean that the cannabis business is doing well or that the overall business will become profitable; Alcanna incurred a net loss last year and might not necessarily boost SNDL’s bottom line.

Investors will get an update on how the business has been doing when SNDL releases its latest earnings numbers, which are expected early this month.

There’s little reason to own the stock today

SNDL has been a chronic underperformer for years, and has relied on acquisitions of late to transform its business. They will provide an easy way for it to manufacture growth this year, and investors should be careful to look at how each individual business unit is doing before making a decision on whether to buy the pot stock or not. And while the reverse split certainly didn’t make SNDL any worse of a buy, it also didn’t make it any better, either.

Investors should be careful in assuming that SNDL’s share price has reached a bottom as a bad stock can always go lower. The benefit of selling the stock today is that at least you can salvage what’s left of your investment because at this point, I wouldn’t be optimistic that there will be a big turnaround anytime soon.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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