Wait for Opportune Weakness Before Buying Sundial Growers

Putting it simply, the story with Sundial Growers (NASDAQ:SNDL) has evolved. No longer the legalization lottery ticket it once was, the idea that you can buy SNDL stock today and flip it when the U.S. approves marijuana on the federal level has more or less gone out the window.

SNDL stock
Source: Postmodern Studio / Shutterstock.com

Instead, you are making a different bet when buying the stock today. You are betting that it can take its high cash position — plus its recent acquisitions — and parlay them into an enterprise worth more than what the market currently values the company.

There are pros and cons to this evolution. On the one hand, the company’s future is now not as dependent on events outside of its control (i.e. pot law reforms). However, with this change Sundial will likely start to trade more on its fundamentals. That’s a problem, as shares aren’t exactly a bargain — even at what looks like a super low price on the surface. Currently, SNDL trades for around 66 cents, down more than 83% from its 52-week high.

So, what’s the best approach with Sundial right now? Wait for another slide in the price. A dip like that could happen, as there are many ways the company could disappoint in the months ahead.

The Latest with SNDL Stock

With the legalization catalyst not as front-and-center as it was at the start of 2021, the focus with SNDL stock has shifted to recent M&A (mergers and acquisitions) news with the company.

The latest acquisition news? Sundial’s deal to buy Alcanna (OTCMKTS:LQSIF), a Canada-based liquor retailer that also owns a 63% stake in cannabis retailer Nova Cannabis (OTCMKTS:NVACF). Interestingly, despite Sundial’s massive unrestricted cash position, the company has opted to make this an all-stock transaction.

Whether this is a move that’s in the best interest of current SNDL investors is debatable. In exchange for more shareholder dilution, the company is getting a business that’s cash flow positive. There’s also the opportunity for it to realize cost and revenue synergies from the tie up. Still, issuing so many new shares in order to pay for the $346 million CAD ($280 million) deal looks unfavorable.

Why? The pie, as it were, is getting cut up into many more slices. The upside potential from any of its catalysts becomes more limited each time the share count grows. With this, it makes sense why — after a brief spike following the deal announcement — the SNDL stock price hasn’t moved much.

Several Things Could Cause Another Drop in Price

Admittedly, the chances of buying SNDL stock at what I called a “can’t miss price” back in September are now slim. Investors today may be unwilling to send it back above $1. But the idea that further disappointment pushes the stock down (even temporarily) to its total cash per share (48 cents) may also be wishful thinking.

Or is it? There are several ways Sundial shares could take a big tumble in the next year.

First, further inaction in regard to legalization could lead to a selloff. With Democrats struggling to overcome intraparty gridlock and get infrastructure and social spending bills passed, investors have all but written off the possibility of pot reform this year. But there may be more disappointment ahead when it comes to this potential catalyst. If pot reform remains on the back burner in 2022? The market may be even less inclined to factor it into SNDL stock.

And outside of legalization-related disappointment? Underwhelming results from the company’s SunStream Bancorp venture or from its other direct debt-equity investments could cause a price drop as well.

Bottom Line with SNDL Stock

Trading at a slight premium to its book value, Sundial may not be the most overvalued marijuana stock out there. But with the high likelihood of further disappointment, why bother buying shares at today’s prices?

It is going to take time for this one’s fortunes to improve. However, if you are bullish that the moves the company is making today will pay off down the road? Take your time before buying.

That’s not to say you have to wait for it to hit a fire-sale price. But waiting for the next dip to 50 cents or so may be the best approach with SNDL stock moving forward.

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On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of 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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/11/wait-for-opportune-weakness-before-buying-sndl-stock/.

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