Don’t Pin Your Hopes for Sundial on U.S. Legalization

Given how contentious the 2020 U.S. presidential election was, one can’t assume whether someone voted for President Joe Biden or former President Donald Trump. But what may be a strange consolation prize for those that supported “The Donald” is potential cannabis legalization, a factor that has steadily bolstered companies like Sundial Growers (NASDAQ:SNDL). Despite much choppiness, SNDL stock is up significantly higher from its December 31 closing price of 47 cents.

photo of a hand holding a marijuana joint that is smoking against a green outdoor background


Of course, Sundial Growers in particular is popular with the social media crowd. Now, I’m not about to outright declare SNDL stock a meme trade since bringing that point up generates tremendous heat. What I will say is that SNDL has meme-ish qualities, whereby traders post encouraging, amusing or downright delusional comments on social media, all in an effort to drive shares higher.

To be fair, though, the enthusiasm for SNDL stock isn’t just centered on social media. Instead, there is a possibility that the U.S. government could legalize cannabis at the federal level. If so, this move may usher in accretive economic growth — something we can all use.

And I’m not just saying that. Prior to the Covid-19 pandemic, the cannabis sector represented the employment sector with the biggest job growth. Further, despite the severe economic impact that the public health crisis imposed, the cannabis industry is still pumping out employment opportunities, “creating jobs at a faster rate than any other American industry.”

If that wasn’t a powerful enough catalyst for SNDL stock and its ilk, consider the political divide in this country. It seems like Democrats and Republicans can’t agree on a single darn thing. If a Democrat says the sky was blue, a Republican walks outside to confirm it isn’t.

Where the conflict softens, however, is good ole Mary Jane. As evidence, both major parties approved the Agriculture Improvement Act of 2018, colloquially known as the farm bill which basically legalized hemp.

Don’t Jump on SNDL Stock Just Yet

Based on this encouraging political backdrop, many reasoned that SNDL stock is a worthwhile bet. Though headquartered in Calgary, Alberta, Sundial Growers can potentially break into the U.S. market should federal legalization receive the green light. Specializing in premium-quality cannabis products that address a range of needs, Sundial has a wholesome image — or at least as wholesome as a cannabis maker can get.

But just how realistic is federal legalization? While it might seem like having Biden in the White House would usher in a green-friendly future, the only kind of green we’re seeing with any substance is in clean energy. While the President seems very open to decriminalization, he hasn’t been gung-ho about adult recreational legalization.

I’m speculating, but he might not change his tune. As a moderate with left-leaning ideas, Biden doesn’t necessarily want to rock the boat. Also, one factor that doesn’t get discussed much about legalization is the human element. That is, people generally want history to remember them kindly. Therefore, making a bold bet on a paradigm-shifting piece of legislation may be a bigger risk than we non-politicians might appreciate.

The country already has a massive problem with opioids. Therefore, some fear, legalizing cannabis may serve to exacerbate underlying mental health issues that led to opioid use and addiction in the first place. Many experts have argued as such and from a logical perspective, the thesis has some valid points.

Moreover, nobody knows for sure how legalizing weed will affect society. Even if it has no effect, the optics open themselves for sharp politicized criticism. Let’s say as an example that crime jumps higher following legalization. Whether marijuana was responsible or not, the opposition party can claim it was due to legalizing weed.

Thus, even from a purely political perspective, giving the federal green light is very risky to both Biden and the Democrats.

Legalization Will Also Lead to Self-Contradictions

Another reason why speculators of SNDL stock may want to reconsider the legalization narrative is that it will spark contradictory actions within the government. For example, the National Institute on Drug Abuse has a directive to analyze addictions in an effort to reduce narcotics use.

But if the federal government legalizes marijuana, what kind of message would that send? In its studies, the National Institute on Drug Abuse discovered data that is consistent with the charge that cannabis is a gateway drug. That doesn’t necessarily mean there’s a cause-and-effect relationship. But this agency implies that freely available cannabis may present societal risks.

Again, from this perspective, the juice may not be worth the squeeze for President Biden. The farm bill was palatable because legal hemp does not trigger a psychoactive effect. But the same cannot be said for fully potent cannabis.

Therefore, if you’re going to bet on SNDL stock, it’s best to assume no movement on the legalization front. If cannabis does receive the green light, it’d be a pleasant surprise. But if not, at least you made your decision based on factors unrelated to this legislative debate.

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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.

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