Sundial Growers Stock Faces More Complications

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In my last go-around with premium Canadian cannabis specialist Sundial Growers (NASDAQ:SNDL), I noted fundamental concerns with the organization. Primarily, the legal framework in the U.S. was unclear because of the upcoming Georgia runoff elections, which will determine control of the Senate. As well, legal marijuana tends to attract a boatload of competitors. Therefore, Sundial Growers stock seemed unusually risky, though I mentioned that I did like the technical setup.

image of marijuana leaf on top of several one-hundred dollar bills
Source: Shutterstock

Hindsight being 20/20, I should have emphasized the latter point instead of making it more or less a footnote. As you know, Sundial Growers stock has delighted Wall Street traders, exploding higher a few days after the 2020 election as it became apparent that Democrat Joe Biden would be the winner.

Later, shares jumped higher in part due to anticipation of broader U.S. marijuana legalization.

In that respect, the speculation on Sundial Growers stock is not unjustified. When I first wrote about the underlying company, I mentioned that the election overall was disappointing for the Democrats. Sure, Biden won but he had a less-than-convincing victory, which has inspired those on the right to cry foul. Second, Democrats lost some seats in the House, which didn’t bode well for the Senate runoff races.

However, the lifeline that SNDL received is discord within the conservative movement. Many on the right view the GOP as being treasonous to President Donald Trump in his hour of need. Therefore, Republicans don’t seem to be as concerned about the Georgia runoffs as perhaps they should.

Most importantly, I don’t think the inner tensions are part of the usual rancor in politics. Over the weekend, so-called white majoritarians chanted “destroy the GOP.” Put another way, the prime conflict today is whether conservativism should be tied to policy or to racial identity.

Some very vocal conservatives want the GOP to be white again, which is anathema to bread-and-butter Republicans, along with normal people. Therefore, it’s possible that Democrats can win both Georgia runoff races, which cynically helps Sundial Growers stock.

Risks for Sundial Growers Stock

But it’s not just politics that have helped SNDL improve its investment profile. In a somewhat counterintuitive manner, the novel coronavirus facilitates potential upside in Sundial Growers stock.

As you know, the pandemic has been disruptive in one way or another. In the most extreme end, you may know someone who tragically succumbed to the virus. But for most of us, the impact has been limited to our work schedule and other major adjustments, such as remote learning.

Naturally, people are looking for an organic solution to alleviate their stress. Though official pronouncements on the medicinal benefits of cannabis are difficult to come by, millions of consumers swear by its effectiveness. Thus, Sundial Growers stock may benefit from the underlying product evangelism opportunity.

To that end, Sundial’s emphasis on high-quality, indoor facility produced cannabis products theoretically better serves the discerning consumer. Still, the benefit to SNDL stock is up for debate.

Essentially, this is because the coronavirus is a double-edged sword. While it offers free marketing, the pandemic also sparked an economic crisis. If you look at the latest read in the personal saving rate, it’s still incredibly elevated. I’m pretty sure Canadian consumers aren’t that much different from their American counterparts. During periods of uncertainty, you save money.

And that means you cut your personal budget on the easy discretionary items, like recreational platforms. According to a Time article in the midst of the Great Recession, many alcoholic beverage drinkers traded down to cheaper brands. No doubt, they wanted to party but to party in a fiscally responsible way.

To be fair, some imbibers paid more for premium alcohol brands. But then again, many customers opted for low-cost beers.

Of course, the takeaway is that if consumers will go cheap on their alcohol, then it’s reasonable to assume they’ll go cheap on their marijuana. This possible emphasis in cost in the new normal could hurt Sundial Growers stock in the longer run.

Financial Red Flags Raise Concerns

If you take a look at recent InvestorPlace articles, quite a few of them are bearish. Frankly, the financials underlining Sundial Growers stock leaves much to be desired.

Before you take a big, long-term wager on SNDL, you’ll want to consult the analysis of Mark Hake. Hake deep dives the numbers like no other and he’s particularly worried about Sundial’s cash burn. At the present rate, it won’t be long before the company simply runs out of money. To stay alive, management will be forced into dilutive measures, which will be negative for the share value.

Adding to that risk is the possibility that consumers will eschew premium cannabis for the cheapo variety. If that happens, SNDL could get ugly fast. Therefore, my take remains largely the same: speculators can gamble on it, but investors are probably better served with (ironically) higher quality names.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/sundial-growers-stock-faces-complications/.

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