I have written about the potential of Sundial Growers (NASDAQ:SNDL) stock in the past. Since those articles, SNDL stock has traded mostly flat to slightly negative. From a technical analysis perspective, the stock is still in a major downtrend as it works to clear the overhang caused by its major rallies.
This is the type of setup I typically like. A stock that has a large amount of bearish sentiment coupled with positive developments in the underlying company. SNDL stock hasn’t been noticed by investors just yet but there continue to be many things to like about Sundial.
Democrats Push for Decriminalization
The legalization efforts for marijuana in the U.S. have recently reached another important milestone. Recently Sens. Elizabeth Warren and Cory Booker sent a formal letter to the Department of Justice urging the decriminalization of cannabis. This can be seen as a small steppingstone toward the full legalization of cannabis at the federal level. Removing the drug from the controlled substances list will pave the way for individual states to pass their own laws.
The senators wrote in their letter, “While Congress works to pass comprehensive cannabis reform, you can act now to decriminalize cannabis.”
I believe that there is a very good chance that decriminalization would push through in the event that Congress is not able to pass legalization. The Biden administration needs a win given all the recent crises. Moving cannabis legalization could prove to be an easy win to boost this administration approval numbers.
If cannabis is decriminalized it is easy seeing this snowball to full legalization. The vast majority, roughly 91% of adults, in the United States support loosening cannabis restrictions. Therefore even if the U.S. gets a Republican president after Biden, it will be very difficult to roll this policy back.
The progress towards the legalization of marijuana in the U.S. will benefit companies like Sundial. The potential market size for a legal marijuana market could be as high as $70.6 billion by 2028.
Management Continues With Value-driving Acquisitions
Sundial isn’t resting on its laurels though waiting for politicians to act. The company’s management has been very active in restructuring its operations and closing new deals to earn a good return on its massive cash balance. The latest acquisition of which is the company’s acquisition of Alcanna. This acquisition, worth $346 million, will be paid for in stock, therefore not reducing Sundial’s cash balance. This means the company will still have the same amount of cash on hand in order to find deal opportunities.
I really like this move by the company. Alcanna is the largest private liquor retailer in Canada with 171 locations primarily in Alberta. For those unfamiliar, selling liquor is a highly regulated industry in Canada. It is a market that is virtually closed off to new entrants giving companies like Alcanna a deep moat. While I don’t think liquor retail has high growth potential, it is without a doubt a cash-generating business. Alcanna has generated $16.4 million in free cash flow in the last four quarters.
Apart from its liquor business, Alcanna also owns 63% of Nova Cannabis, a large Canadian cannabis retailer. Nova Cannabis operates 62 stores in Alberta, Saskatchewan, and Ontario. Adding these stores to Sundial’s existing retail locations would represent a 60% growth in store count.
Having a wide retail network has two major advantages for the company. The first is the ability to target a wider range of consumers. According to Sundial management, the combined network will target both high-end and value-oriented consumers. The second advantage is with regard to economies of scale. Having a larger retail network would allow Sundial to better spread fixed costs thus increasing overall profitability.
Investor Takeaway on SNDL Stock
SNDL stock continues to be an investment with a favorable risk-to-reward ratio. Management continues to impress me with their deal-making savvy. All the while progress on U.S. marijuana legalization is humming along. There are plenty of future catalysts for SNDL stock. Investors should take the chance to accumulate at these levels.
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On the date of publication, Joseph Nograles 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.
