Three Reasons to Buy Sundial Growers Stock Now and Bet on Upside

Reddit stocks are back with a vengeance. Sundial Growers (SNDL) stock rose over 13 percent on May 26. Why is SNDL stock rising and should you buy the penny marijuana stock now?

Sundial Growers stock has had a turbulent run in 2021. The stock hit a high of $3.96 amid the Reddit mania but the gains soon fizzled away. Even now, the stock is down 78 percent from its 52-week highs. However, it's still up 81 percent for the year.

There are three main reasons why SNDL stock is rising. First, there's a rally in stocks that were once popular on the Reddit group WallStreetBets. The so-called meme stocks have jumped sharply over the last few trading days.

Second, there was a rally in marijuana stocks on May 26 amid hopes of federal legalization. The sector-wide rally also helped catapult SNDL stock higher. Finally, SNDL stock started to look attractive from a valuation standpoint. The company had a net asset value of $0.61 as of March 31. As of May 7, it held $752 million worth of cash and cash equivalents.

While SNDL looked like a zombie company last year, it's a debt-free cash-rich company now. The management should be thanking the Reddit-driven rally, which it duly capitalized on to issue new shares in a frenzy.

The market opinion, especially among Wall Street analysts, is bearish on Sundial Growers stock. I also have bearish views on the company due to its core business, which is still struggling. Not much has changed for Sundial Growers’ core business. It continues to lose money even though it posted an adjusted EBITDA profit in the first quarter of 2021.

Here’s where SNDL’s cash pile makes the stock a buy. The company posted an EBITDA profit in the first quarter due to the income it earned from investments. A lot of marijuana companies are struggling to raise funds and SNDL’s cash pile is coming in handy. It's lending to fellow marijuana companies at attractive terms and is also looking to form a SPAC to look at opportunities in the sector.

The crisis in some of the smaller marijuana companies is an opportunity for SNDL stock. If the management executes well on the investment strategy, SNDL could be a winner for investors.

SNDL’s short interest was over 256 million shares as of the most recent filing. The days-to-cover ratio is more than one based on the data. We could also be seeing a short squeeze happening in SNDL stock. It could be a déjà vu moment for SNDL bears after burning their fingers badly in the previous short squeeze.

SNDL’s core marijuana business has disappointed, but management is working on a turnaround. However, more than the turnaround, the stock looks like a buy at these levels due to the short squeeze and the company’s cash pile, which is almost half of its current market capitalization.

Meanwhile, if you're looking for a marijuana stock to play the core marijuana business, Tilray could fit the bill after its merger with Aphria. The stock looks like a good buy with diversified operations and a reasonable valuation.