You probably think of Sundial Growers (NASDAQ:SNDL) as a marijuana play. After all, it’s one of the larger publicly listed cannabis companies out there. In the past, SNDL stock has tended to trade in line with its marijuana peers. Now, however, things have changed.
At least for the time being, Sundial is no longer a traditional cannabis stock. Instead, it’s a Robinhood play. Right now, Sundial’s fate is closely tied to the trendy new brokerage firm. And with a momentous act on Thursday, Robinhood threw Sundial — and other such stocks — into uncertainty.
This is a fluid situation, but here’s what we know as of this writing.
SNDL Stock and the Massive Short Squeeze
In recent days, stocks of certain businesses with poor fundamentals and large operating losses have positively exploded. We’re talking about the likes of Gamestop (NYSE:GME), AMC (NYSE:AMC) and so on. These were moves in thousands of percent in some cases.
But why are these moves happening? Short squeezes. The folks over at Wall Street Bets on Reddit — as well as other online trading communities — deduced that they could drive up the value of certain businesses with low share prices and bad fundamentals. They also found that they could pull this off by simply engaging in the relentless buying of these securities, powered by the meme magic of social media. With enough continuous buying, short sellers were soon eviscerated. That even led to the collapse of major firms, like Melvin Capital.
Of course, SNDL stock hasn’t blasted off like Gamestop, for instance. However, it has enjoyed similar interest from certain online trading groups — and now it’s subject to the consequences.
Robinhood Cracks Down
Many of these social-media-powered traders like using Robinhood because of its mobile app and ease-of-use. As a result, many of those traders plowing into Gamestop, AMC, Sundial and the like were buying these stocks on the platform.
Evidently, though, Robinhood grew increasingly alarmed about those unprecedented levels of speculation. Because of that, the firm decided to try to chill the waters a bit.
On Thursday, Robinhood announced that it was restricting trading of particularly volatile securities until the current mayhem dies down. Its press release including the following:
“We continuously monitor the markets and make changes where necessary. In light of recent volatility, we restricted transactions for certain securities to position closing only. You can see the latest here. We also raised margin requirements for certain securities.”
Closing positions only, to be clear, means that traders can only sell their existing positions in the particular stocks noted by the platform — GameStop, AMC, BlackBerry and Sundial, among others. So, with that move, Robinhood stopped its users from buying additional shares in those listed stocks, including SNDL stock. The effect was immediate and dramatic — GME, for example, saw its stock plummet in a couple of hours following Robinhood’s move.
What’s the Impact on Sundial?
SNDL stock had been up from the 60 cent range to more than a dollar on Thursday morning. It then dropped back to 82 cents for the close, following the Robinhood ban. However, Sundial didn’t completely implode like some of the other targeted securities. That’s probably because Sundial had never gone up nearly as far in the first place.
As I’ve previously discussed, it seems like Sundial was drawing interest because it was one of the marijuana stocks with the cheapest share prices out there. For awhile, the stock was under 50 cents. To unexperienced traders, a stock at 50 cents may seem a lot more appealing than one trading at $10 or $20 per share. That’s a factor of people not really understanding the difference between market capitalization and share price.
Nonetheless, the effect is real and Sundial enjoyed powerful retail trading interest in recent weeks. That has made Sundial a fantastic day-trading name, but much less attractive as an investment.
SNDL stock will struggle to go on another sustained rally as long as Robinhood and other brokers restrict buying. What’s more, Sundial’s operating business metrics simply aren’t that great. Investors looking to buy the best marijuana company based on revenue growth or a profits basis are unlikely to pick this company.
Therefore, the outlook for Sundial is highly dependent on what happens with Robinhood. There has been huge backlash against the firm for its decision to block buying of certain stocks — Congresswoman Alexandria Ocasio-Cortez and Barstool Sports founder Dave Portnoy are among those leveling withering criticism against it for the decision. Robinhood did say on Thursday evening that it would allow “limited buys” of the blacklisted stocks going forward, but it’s unclear how strict those limits will be.
To be fair to Robinhood, though, it isn’t the only brokerage firm that has cracked down on these sorts of stocks. For instance, Interactive Brokers (NASDAQ:IBKR) also limited trading of certain volatile securities and jacked up margin rates on others to try and tamp down the volatility. The U.S. Securities and Exchange Commission (SEC) is also reportedly investigating the unusual trading in these stocks as well.
All that is to say that it’s a perplexing situation for SNDL stock owners. I’d steer clear of this name, simply because the underlying business is troubled. Basically, it’s a roll of the dice regardless. But, that said, pay attention to the upcoming developments with brokerages closely. Obviously — as long as places like Robinhood are limiting folks from buying SNDL — its share price will face a massive headwind moving forward.
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On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.