A meme is one thing that grows in reputation on the Web. Sometimes it refers to a picture with a humorous caption, however with extra retail buyers shopping for shares, it has unfold into the investing world as properly — and there may even be “meme shares” that rise in worth primarily resulting from their rising reputation on the Web. An excellent instance is GameStop, the place a struggling enterprise discovered life and skyrocketed in worth this 12 months, largely resulting from its reputation on the /r/WallStreetBets Reddit discussion board.
The issue with an funding like that’s there’s not essentially a lot substance behind it, and it is merely a speculative purchase. One other inventory that’s fashionable on Reddit and that may doubtlessly fall into the meme class is Sundial Growers (NASDAQ:SNDL). It has greater than doubled in worth this 12 months, however is it actually all resulting from hype, or is that this a superb funding that you must contemplate placing in your portfolio at present?
Why has Sundial’s inventory been hovering?
For a inventory to have doubled 12 months thus far (and vastly outperformed the S&P 500 index, which is up simply 6%), you’d anticipate there to be some huge information or some unbelievable numbers behind the rally. However neither scenario applies to Sundial. Essentially the most noteworthy improvement was its pursuit of Zenabis on the finish of final 12 months — it purchased the hashish producer’s debt, fueling hype that Sundial could also be seeking to make a doable deal. Nevertheless it did not find yourself buying Zenabis; HEXO did.
And the rise in worth certainly hasn’t been because of its outcomes. On Nov. 11, Sundial launched its earnings for the interval ending Sept. 30; income of $12.9 million was down 54% 12 months over 12 months, and its internet loss totaled $71.4 million. On March 17, it posted its fourth-quarter numbers, which additionally weren’t all that nice. Income for the final three months of 2020 spiked to $13.9 million, up 8% from the third quarter, however that was additionally down 6% from the prior-year interval. And though its internet lack of $64.1 million confirmed enchancment, Sundial was nonetheless deep within the purple final quarter.
One factor that Sundial does have proper now could be choices. On March 15, its unrestricted money readily available totaled $719 million — thanks largely to a few choices in February as the corporate took benefit of its rising share worth. That offers administration the power to tackle some acquisitions if it needs to. And the potential for a deal is probably going why buyers are bullish on Sundial — the best acquisition may make it a significantly better purchase than it’s proper now, sending its share worth up. In its newest earnings launch, administration stated they “proceed to discover strategic alternatives,” mergers, enterprise combos, and investments in not simply Canada and the U.S., however different worldwide markets as properly.
With out the potential for a merger or acquisition — or the hype surrounding this inventory on the Web — shares of Sundial in all probability would not be doing so properly this 12 months; there simply aren’t actually some other causes to spend money on the corporate. Information from Alphabet‘s Google Developments exhibits that search reputation for Sundial Growers reached a peak through the interval of Feb. 7 to Feb. 13. Here is what the inventory did throughout that timeframe:
Why you should not leap aboard the bandwagon
It might be tempting to purchase shares of Sundial and hope that Web reputation does for it what it did for GameStop (which at one level this 12 months was up greater than 1,500%). However since Feb. 1, each shares have fallen in worth — GameStop by 20% and Sundial by 7%, whereas the S&P 500 has risen greater than 5%. Traders have begun to take a second take a look at a few of their decisions, and speculative buys have fallen consequently. I imagine that if one thing does not make sense it is going to right itself, and that applies to overvalued shares. It might not occur straight away, however that does not imply a correction is not inevitable.
Retail buyers might transfer on to different tendencies available in the market (NFTs, perhaps?) and even pull their cash out fully in the event that they get bored. And that is the most important danger with shopping for meme shares — they’re unpredictable. Hype that exists at present may rapidly fade tomorrow. And primarily based on its underwhelming outcomes and rising reputation on the Web, Sundial positively belongs in that class. For those who’re searching for a superb and secure funding, avoid this one. There are many higher growth stocks on the market.
This text represents the opinion of the author, who might disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one among our personal — helps us all suppose critically about investing and make selections that assist us turn into smarter, happier, and richer.