New traders and investors often find lower-priced, smaller-cap stocks more attractive than the bigger, more well-known names. It is understandable because these low- priced names can move much bigger and faster than higher-priced big-cap names. It can be quite entertaining, and even profitable, to trade the little names that are attracting attention on social media.
The problem is that fast-moving, low-priced names are often much riskier. If you are not an experienced trader, it is easy to be trapped in these positions because there are no positive fundamentals to bail you out. Quite often, the low-priced stocks will enjoy a day or two of action and then fade away and never be heard from again.
The cannabis sector has a good example right now. Many new traders are attracted to a low-priced stock called Sundial Growers (SNDL) - Get Sundial Growers Inc. Report. SNDL is trading around $1.15, as I write. It has been heavily promoted in Discourse chat rooms and on Reddit, especially the WallStreetBets subreddit. These sites have millions of members looking for a trade.
The primary appeal of SNDL is that it is low-priced and has a very large following of small investors that believe they can move this stock. There is not a large short position in SNDL, but the thinking on social media is that small traders will be drawn to a low-priced stock that is in the strong cannabis sector. In addition, there is no restriction on trading it with brokers like Robinhood or WeBull (though Sundial was briefly on Robinhood's restricted list last week). In addition, many of the other cannabis stocks are listed on the OTC bulletin board and so can not be traded at Robinhood.
There is some talk about positive fundamentals here, but the company has yet to produce significant revenues and has used the recent rise in stock to do several large direct offerings. SNDL may eventually be the winner that some traders hope it will be, but many of them are blinded by the fact that the stock is cheap. A low price does not mean that a stock is a good value. Often it is just the opposite. The odds that a stock priced at a dollar becomes a major long-term winner are quite low.
A play that has much higher odds of long term success in the cannabis sector is Trulieve Cannabis (TCNNF) - Get Trulieve Cannabis Corp. Report. Trulieve is a vertically-integrated ‘seed-to-sale’ operation that has about 51% of the cannabis market share in Florida. It operates in several other states and plans to expand quickly.
Trulieve’s revenues have grown from $35 million in the third quarter of 2018 to $136 million in the third quarter of 2020. Even though it is opening stores at a very fast pace, the company is profitable and should earn $0.47 in 2020 and grow that 177% to $1.30 in 2021. The company is well-positioned to expand into recreational cannabis if legislation is passed since it already has many outlets and infrastructure in place due to its extensive medical cannabis operations.
Roth Capital placed a buy on the stock on Thursday with a $60 price target. The analyst noted that the company is the industry leader in profitability with high free cash flow levels.
It is important to note that U.S. cannabis companies are currently prohibited from fully listing on the Nasdaq or NYSE (Sundial is based in Canada so it's able to trade on the Nasdaq). They instead trade on the OTC market. Some large funds are prohibited from owning stocks that trade OTC and some brokers, such as Robinhood, do not allow their customers to trade these stocks.
If the Senate reduces some of these restrictions, an ‘uplisting’ to Nasdaq would likely be a major positive catalyst not only for Tuelieve but for other multi-state operators of cannabis outlets. Senator Majority Leader Charles Schumer said this week that they would make cannabis reform a priority this year. The chances of reform are the highest they have ever been.
TCNNF may not be the sort of day trading vehicle that many new market participants are looking for, but the chances of some quick success are much higher than they are with a very low-priced stock like SNDL.
James "RevShark" DePorre is a regular contributor to Real Money, TheStreet’s premium site. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Stephen Guilfoyle and others.
At the time of publication, James was long TCNNF.