As Long As Legalization Is Possible, Buy Sundial on Any Pullback

Its recent earnings report may show its fundamentals are improving. But one thing still matters most for Sundial Growers (NASDAQ:SNDL) stock: its legalization catalyst.

SNDL stock
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As I’ve written many times here at InvestorPlace (most recently on Aug. 13), the possibility of pot becoming legal on the U.S. federal level remains the main reason to buy this stock.

The spread between its share price and book value has come down substantially. This may point to it being a gamble worth taking. Better yet, factors independent of its main catalyst could push shares to an entry point where there’s even less downside risk.

If markets correct in the coming months, speculative plays like SNDL stock may get hit the hardest. This may result in Sundial briefly falling to a price on par with its book value. Or, perhaps even to a price so low it matches the per-share value of its cash position.

Risk-hungry investors may find it worthy of a buy today. But consider it a screaming buy on any large pullback. Assuming, of course, changes to America’s federal pot laws remain a possibility.

SNDL Stock and the Latest on Legalization

The U.S. insurance industry may be preparing for it happen. But since I last wrote about Sundial stock, not much has changed with the chances of pot law reform happening in 2021 or 2022. Senate Majority Leader Chuck Schumer’s highly publicized bill still likely doesn’t have the votes needed to pass.

Yet, other positive indicators, such as the legalization of pot in states that vote Republican, and widespread support for legalization among Americans, point to change sooner than later. This is likely why SNDL stock has found a floor at today’s prices.

The meme stock trend that sent it to prices nearing $4 per share has come and gone. But with the potential for full-on legalization (which will enable this Canada-based company to enter the U.S. market), investors are still willing to price it at a moderate premium.

That being said, it may not be for sure that SNDL stock holds steady from here, until it’s known whether pot law changes happen within the next year, or several years down the road.  Factors independent of this catalyst could knock it down once again to a price level that makes it an ever better risk/return proposition.

Why Sundial Could See a Better Entry Point

Risky stocks like this one are down big from their meme stock highs. Yet, they haven’t made their way back to their pre-meme levels. What’s the reason for that? It could be the resiliency of the market that’s propping them up. So far, risks like changes to monetary policy, or Covid-19’s Delta variants, have yet to really affect the overall market.

However, this could change. Some have still been ringing the warning bells that a stock market correction could be around the corner. If it happens, it’ll hit names popular with retail traders the hardest. That may be bad if you are still long-and-strong many of the meme stocks that remain far above their pre-hype price levels.

But if this scenario ends up happening, it could give you the opportunity to buy SNDL stock at an even better entry point.

Let’s say markets get stormy in the months ahead. Investors turn to safer investments. Retail traders get skittish and cash out of their speculative plays in a panic. This may result in this getting pushed down from today’s levels (around 76 cents per share), to prices not that far above its current book value per share (53 cents).

If a more dramatic sell-off happens? Sundial could fall to a price near its total cash per share (39 cents). At that rock-bottom level, you are getting its operating business, and its possibly game-changing catalyst, for free. Now, the chances of a fall to 39 cents may be slim. Yet a move to 50 to 60 cents, a level where little value is assigned to the operating business, could be something with a decent chance of happening.

Buy Any Pullback

Admittedly, some may still find buying Sundial today a worthwhile gamble. If legalization doesn’t happen, shares will likely fall to book value, just 31% below current prices. That pales in comparison to the possible triple-digit percentage gains that may be seen post-legalization news.

However, an even better risk/return proposition could be around the corner.

Investors who want this to be the most asymmetrical wager possible may want to wait for possible market volatility to knock SNDL stock once again. At lower levels, you have very little to lose, but a lot of upside potential.

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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.


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