I’ll hand it to investors in Sundial Growers (NASDAQ:SNDL). Based on what looks like nothing more than the hope that the United States may legalize marijuana, SNDL stock has surged 273% since Election Day. But the company still looks tremendously flawed, and I believe it may even wind up being a takeover target.
Part of Sundial’s problem may be poor timing. The company went public, probably out of necessity in 2019. However that was a year too late. The real action was happening in 2018. As a result, SNDL stock has been going down since its initial public offering.
And right now the company finds itself in what is an all-too-common narrative among cannabis stocks. That is: accumulate debt, issue new shares to wipe out debt, dilute shares. Repeat.
Right now Sundial is a penny stock and stocks are usually penny stocks for a reason. Nevertheless, if you’re one of the optimists (or a shareholder ) of SNDL stock, let’s try to see if there’s reason for hope.
Is Legalization a Real Possibility?
Cannabis stocks are having a resurgence. Part of this is the hope that the incoming Biden administration will legalize marijuana. A look at Sundial’s stock chart shows that it saw a significant bounce in the run-up to the Senate runoff in Georgia. In fact, the hope that a blue wave will usher in legalized marijuana seems to be the only thing propping up the stock.
My bullishness on the cannabis sector has always been linked to its medicinal use. Simply put, I think that the risks of addiction are mitigated with its potential to provide genuine pain relief. And in any event, there is an opiod crisis in our world.
Back in 2018, the Centers for Disease Control and Prevention (CDC) estimated the total “economic burden” of prescription opioid misuse alone in the United States was $78.5 billion a year. By total economic burden, the CDC was including the cost of healthcare, lost productivity, addiction treatment, and criminal justice involvement.
In terms of legalization, the United States is much further along with legalizing medical marijuana. Currently, 36 states plus the District of Columbia have approved marijuana for medical use.
A Taxing Problem
But I digress. The novel coronavirus is devastating state budgets from sea to shining sea. And that means that many states that were previously opposed to legalizing marijuana are seeing the economic necessity of the tax revenue.
So it seems that states are in a race to embrace vice sectors including sports betting and recreational marijuana. However even with this renewed momentum, it will take time for recreational marijuana to be legalized for all states. The faster path would be to have the federal government lift its ban.
So far, that would seem to be a bridge too far for the incoming President. Although Joe Biden has endorsed decriminalizing marijuana, he has been outspoken in his opposition to legalization. But politicians flip-flopping on issues would be neither new nor surprising.
SNDL Stock Looks to Be Waiting on a Dance Partner
Needless to say, I’m skeptical that marijuana will become legal as fast as investors hope. Nevertheless, it’s clear the cannabis sector is entering the consolidation phase. One reason for this is that the sector is now gaining traction in Canada. However after two years where cannabis companies couldn’t seem to catch a break, it seemed to be only natural that it was time for some good news.
As the sector begins to grow, it’s becoming clear that only the strongest will survive. And there is some movement toward mergers and acquisitions.
That may be your best-case scenario for SNDL stock. The company’s focus on the premium cannabis segment may be enough to fog the mirror of another cannabis company.
As it stands, I don’t think you can bet on Sundial to have enough strength to stand on its own. Sundial is a pass for me.
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 seven years. He has been writing for Investor Place since 2019.