With GameStop’s Collapse, Sundial Growers Is Much Riskier

One pointed lesson offered by films like The Wolf of Wall Street is that, by the time you learn about an opportunity from the Wall Street Journal, it’s probably already too late. Now, it’s possible that the same could be said about Sundial Growers (NASDAQ:SNDL). Only this time, the danger is in gambling on SNDL stock based on what you read from r/WallStreetBets (WSB).

marijuana in storage
Source: Shutterstock

As you probably know, WSB is a forum on social media platform Reddit that turned the investment world upside down recently with its extreme contrarianism. Seeking out heavily shorted, publicly traded companies, the users have been buying up shares in what appears to be a coordinated effort to force short squeezes. It’s a brilliant tactic, but one that requires faith in your fellow traders.

So, that house of cards could quickly tumble in a blink. And already, some Redditors who said they’d hold to infinity have started to bail — predictably, according to some critics.

However, the risk to SNDL stock may be less than other so-called “meme” stocks. For instance, some of Reddit’s favorites are fundamentally flawed, either because of the pandemic or industry-related reasons. Sundial, on the other hand, has the support of a burgeoning political narrative.

On the campaign trail, now-President Joe Biden and Vice President Kamala Harris pledged to decriminalize marijuana. While stopping short of full recreational legalization, that’s still a big step for cannabis. It also opens the door to legalization in full. Plus, it doesn’t hurt that some Republicans have started to warm up to weed.

Nevertheless, though, investors should be careful about aggressively pursuing this political thesis — and meme trades in general.

SNDL Stock Is Tempting, Which Is Part of the Problem

I’ve produced some takes about the Reddit situation that I imagine aren’t so popular. However, recent events involving the WSB favorite GameStop (NYSE:GME) has me more convinced about my opinion: the social media warriors don’t care about their fellow traders, no matter what feel-good drivel they post.

To illustrate what I mean, GME recently dropped, perhaps catastrophically. So, those who followed the guidance of WSB messiah “DeepF–ingValue” are now in deep trouble, depending on how much they vested in the stock and at what price.

Sure, I’m personally long on GME, but goodness me. I put stupid money in at a smart price, whereas WSB is luring in smart money at a stupid price. And this brings me to SNDL stock.

One of my InvestorPlace colleagues, Will Ashworth, recently referred to me as honest to a fault. To that end, I hope we’ve realized a couple things from GME:

  1. People lie on the internet
  2. You have no friends on Wall Street

Sure, SNDL stock might sound tempting. It’s priced low, so it appears that advocates are in early. But even the most hardened bulls with “diamond hands” can shirk away under the pressure. That’s what could be disastrous for the perma-longs.

Also, you have to factor in the “DeepPsychologicalWounds” that many WSB traders are probably suffering from right now. Yes, many astute traders are taking their GME profits into other meme plays like Sundial stock. But knowing that the flagship trade has taken such a big blow could spark quicker fallout for SNDL.

Not Entirely Unreasonable

InvestorPlace analyst Thomas Yeung had an interesting take on SNDL stock. In part, he believes if Sundial manages to grab a slice of the $83 billion U.S. cannabis market, the company could “easily reach” an $11 billion market capitalization.

I don’t think that’s an unreasonable expectation. But the nuance of that $83 billion figure is that it includes both legal and black-market sales. The latter segment is a problem because, while cannabis demand will undoubtedly rise due to the novel coronavirus (with people seeking therapeutics for stress), price will also be a concern if the economy doesn’t hold up.

So, basically there are two conflicting factors: initial jobless claims reflect consistent pain in the U.S. labor market and Sundial Growers specializes in high-quality, pricey pot.

I would say that, if you’re going to gamble on SNDL stock, do so carefully. But for those who are pondering a long position, you should research the allocation of black market weed relative to legal weed. If illegal sales continue to rise at the expense of legally sourced revenue, that is not a fundamentally favorable circumstance for this name.

On the date of publication, Josh Enomoto held a long position in GME.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/02/gamestop-collapse-makes-sndl-stock-much-riskier/.

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