In the last 30 days, Sundial Growers (NASDAQ:SNDL) stock has been riding the coattails of a Joe Biden victory. SNDL stock has climbed over 175% since closing at 17 cents per share on Nov. 2. It looks like the day traders have decided that the stock is going to help them have a happy holiday season.
If that sounds cynical, it should. Sundial may be cheap. And by some metrics it may have some upside. But when I look at the big picture there’s a reason for the stock’s poor performance. The company has a heavy lift ahead of it. And the catalyst that traders are hoping for is far from a sure thing.
It Looks Like More of the Same in the U.S.
Cannabis stocks are getting a lift from the presidential election. The conventional wisdom is that a Biden administration will usher in the legalization of cannabis in the United States. A first step towards that end would be the passage of the Marijuana Opportunity Reinvestment and Expungement (i.e. MORE) Act.
The MORE Act is a two-part bill. The first part would release the ban on marijuana as a federal list of controlled substances. And it would also decriminalize marijuana so some individuals would have a marijuana-related offense stricken from their criminal record.
During the campaign, Joe Biden openly spoke of supporting the latter. He was less forthcoming on his support of the former.
And, as David Moadel points out, Senate Majority Leader Mitch McConnell has made his opposition to the MORE Act well known.
Investors Have Georgia on Their Mind
But pot enthusiasts may not need to worry about a Republican-led Senate. If the Democrats can win the two contested seats in January’s run-off in Georgia, their party would control both houses of Congress and the White House.
I have no idea what will happen in Georgia and I don’t get a vote (feel free to insert a snide comment). However, as I wrote recently about the hydrogen industry, the Democrats will need some quick wins in the first 100 days. I’m not sure if legalizing pot makes the cut. Decriminalizing yes, but will the Biden administration want to spend political capital on full legalization? I’m not so sure.
In other words, perhaps for different reasons, I agree with Moadel that the MORE Act is dead-on-arrival. For now, half a loaf may have to be good enough.
The Numbers Aren’t Adding Up
Even if the United States becomes open for business, Sundial faces an uphill battle. And I say this by looking at their sales numbers in Canada. 2020 has been less bad for legal cannabis sales in Canada. However, the forecast has consistently been lowered down.
According to ArcView Market Research the market for marijuana in Canada will reach $1.9 billion this year. That’s below even the lowest estimates for between $2 billion and $4 billion that was forecast earlier this year.
But if we look at Sundial’s trailing twelve month earnings we see a company that has only generated $68.82 million in sales. That would be just under 4% of the market.
And the harsher reality is that the company’s sales are dropping on both a quarterly and year-over-year basis. Which means when the company reports their full-year earnings, it will likely be significantly less than $68.82 million.
Sundial Growers Stock Is Not a Bargain
For its part Sundial is taking full advantage of the temporary lift in its stock price. On Dec. 4, Sundial announced its intention to sell up to $150 million in shares. That came on the heels of the company making an F-3 Securities and Exchange Commission filing to offer up to $200 million in various securities.
But as Mark Hake points out without revenue, this is just a death spiral for Sundial Growers stock. And that’s not something you want to be a part of.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.