The return of “meme stock madness” in late May and early June sent Sundial Growers (NASDAQ:SNDL) stock back towards the moon. Or, at least it tried to. Shares in the popular pot penny stock soared from around 72 cents, to around $1.30, between May 24 and Jun 3.
Yet, in the month or so since, it’s pulled back, and it’s back below $1 per share. The Reddit trader army dived in en-masse, but now they’ve by-and-large cashed out. It’s similar to what’s played out among the “short squeeze” plays, such as ContextLogic (NASDAQ:WISH), and Workhorse Group (NASDAQ:WKHS).
With just 13.7% of its float sold short, it’s a stretch to call Sundial a short squeeze play. Even if it was one, though, that wouldn’t ensure it would soar back to its highs set during the initial “meme stock wave” (nearly $4 per share). The short-squeeze trade has again lost momentum. There’s now just a slim chance any of these names will experience a parabolic run on par with the ones seen with AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME).
Fortunately there is another “high risk/high possible return” factor in this stock’s corner: the pot legalization catalyst. Legalization of marijuana may still be on the Federal Government’s back burner. But, given the way the winds are blowing, legalization is inevitable. Given that this stock will see an outsized movement on such news? It may make sense to start entering a position at today’s prices.
SNDL Stock and The Latest on U.S. Legalization
The most recent “meme stock” rally is now over. Investors can’t count on it to move the needle anymore for SNDL stock. Barring yet another wave, future upwards movement now hinges entirely on the U.S. legalization catalyst.
So, what’s the latest? On the state level, the legalization wave continues. But, as you likely know, this doesn’t help Canada-based pot purveyors like Sundial Growers. To enter the lucrative the American market, this company needs a full rollback of federal-level restrictions. Back in January, the “blue wave” (Democratic party sweep of the White House and Congress) made full-on legalization seem imminent.
But, legalization prospects remain hazy. President Biden continues to stop short of supporting legalization, just decriminalization. This will likely continue to extend the legalization timeline, even as support becomes more bipartisan. Yet, recent statements from Supreme Court Justice Clarence Thomas could further signal that reform happens sooner rather than later.
Why? Per Thomas, the federal government’s moves to create exceptions to pot laws still on the books may have meant it’s ceded its authority to continue treating it as a controlled substance. Does this mean the Supreme Court will legalize pot? Admittedly, no. But, with a politically conservative Justice supporting legalization, more Republicans in Congress may get on board. This could result in a legalization bill that passes with a veto-proof majority.
Why This Stock Remains a Solid Way to Play Possible Pot Reforms
Sundial Growers is still far from being the highest-quality pot stock out there. The “meme stock” waves may have allowed it to raise tons of capital via secondary offerings. These proceeds have enabled it to become debt-free. Not only that, it’s been able to build up a nearly $1.1 billion war chest. But, this came at the cost of heavy shareholder dilution.
The pie’s been cut into many more slices. Yet, so far, SNDL stock hasn’t taken much of a hit. It may be down from its highs. But, it’s still up compared to where it traded before the “meme” investing trend took hold. As a result, shares sport a very high valuation.
Sure, it’s valuation (adjusted for its cash position) may be slightly less than the Enterprise value to sales (EV/Sales) ratio currently seen with rivals like Canopy Growth (NASDAQ:CGC). Yet, if you adjust for underlying business quality, at best Sundial shares are fully priced at 90 cents per share.
So, does that make this a less opportune way to gain exposure to possible pot reforms? Not so fast. Its fundamentals may pale in comparison to Canopy. But, in terms of possible upside from this development, this may still be your best way to play. How? Thanks to the high chances investors will overreact with pricing it, if and when legalization news hits the wires.
Bottom Line: Consider Sundial a Buy at Today’s Prices
Buying this stock as a legalization gamble alone may be an affront to the principles of fundamental analysis. But, given the dynamics in play, the rationale makes sense. Just don’t go hog wild, as things could still go in the wrong direction.
In short, what’s the best move? SNDL stock still has big downside risk. But, considering its “to the moon” potential, once it’s clear U.S. pot legalization is coming, consider it a buy following the recent pullback.
On the date of publication, Thomas Niel 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 InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.