After Election Results, Sundial Is Still a Legalization Lottery Ticket

As you likely know, pot stocks are back in style. With the “blue wave” in Georgia, the Democratic Party now adds control of Congress atop its Presidential victory in November. This bodes well for Sundial Growers (NASDAQ:SNDL). Why? The election results greatly improve the chances that marijuana is legalized on the U.S. Federal level. That is the kind of game-changer hard-hit SNDL stock needs to get its motor running once again.

SNDL stock
Source: Shutterstock

Yet, don’t take this to mean that Sundial’s fortunes have improved overnight. Still working on its turnaround, SNDL remains a very risky cannabis play. Sure, it’s gotten its debt problem under control. Plus, there’s more cash on hand to keep the lights on. But it is still an “also ran” name compared to larger players like Canopy Growth (NASDAQ:CGC).

However, there’s still opportunity here. As a penny stock popular with retail investors, just a bit of positive news could jolt SNDL up to prices far above its current 70 cents per share. That said, this isn’t an opportunity for everybody.

When it comes to Sundial, it won’t take much to drive an outsized rally and it won’t take much to send shares cratering, either. So, more cautious investors should steer clear. But, for folks looking for high-risk, high-potential return plays, this may be just the ticket.

SNDL Stock and Legalization Progress

Along with the executive branch, Democrats now have control of the U.S. legislature. What does that mean for pot legalization in the coming years? Admittedly, there’s still a long road ahead.

However, Congress already has two marijuana reform bills in motion. These are the MORE Act and the STATES Act. The first, the Marijuana Opportunity Reinvestment and Expungement Act, fully removes marijuana’s status as a controlled substance. Secondly, the Strengthening the Tenth Amendment Through Entrusting States Act removes many of the conflicts arising between state and federal marijuana laws.

But, these bills focus more on decriminalization. Further action may be needed to allow Canada-based pot companies like Sundial to enter the U.S. market. That said, any progress with these bills will be a step in the right direction. If either one gets signed into law, it could help drive another parabolic move higher for smaller pot plays like SNDL stock.

And those trading this stock aren’t looking at its fundamentals. So, for the time being any move higher (or lower) largely hinges on how the legalization situation is playing out in Washington.

Don’t Forget the Turnaround Story

Legalization is what’s top of mind among those trading SNDL stock. But, don’t forget that the company’s turnaround story remains in play as well. If it can show solid improvement in its next quarterly earnings release, that may also be enough to fuel an outsized move. And that’s certainly possible. As I previously discussed, Sundial recently moved out of the lower-margin wholesale cannabis business and is now mainly a purveyor of branded cannabis products.

Yet, it’s no slam dunk that this pivot will pay off. As InvestorPlace contributor Larry Sullivan wrote on Jan 7, only “time will tell” whether SNDL is on its way towards profitability.

But even small potatoes improvement could be enough to move the needle. Why? As retail investors continue to dive in en masse based on headlines alone, we could see another big near-term move for SNDL stock. Just keep in mind that this makes it more of a near-term gamble than a sound investment.

Finally, a great quarter is far from guaranteed. If we see atrocious numbers when Sundial next releases results, its shares could tank. But, with greater near-term potential for outsized gains rather than outsized losses, the risk-return may be in your favor.

A Near-Term Trade That’s Not for Everybody

There’s plenty in play to move this stock higher in the near-term. But there are some caveats to keep in mind. For instance, the company took care of its debt situation, but this came at the price of heavy dilution. When those newly issued shares start trading on the open market, we could see downward pressure on the stock.

Also, outsized gains in the near-term are mainly possible due to Sundial’s penny stock status as a Nasdaq Exchange listing. This is what paves the way for the “Robinhood effect” to send it back into hyperdrive. However, given the company will soon have to reverse-split to maintain its market listing, time is running out for this outcome to play out.

So, putting it simply, this pick remains a legalization lottery ticket, with potential improved quarterly results adding in some optionality. For some investors, the stock may be a worthwhile near-term trade. Otherwise, watch out. More of a gamble than an investment, SNDL stock remains a very risky opportunity.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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