I suppose when you’re involved in the markets for several decades, you’re liable to throw a few surprises to readers. That was the case when I saw our own Louis Navellier’s take on Sundial Growers (NASDAQ:SNDL) stock.
Hardly the soft-spoken type, Navellier gives it to people straight, including some much-needed tough love. Therefore, I was a bit taken aback about his concluding thoughts about SNDL stock.
Acknowledging that Sundial supporters’ patience has been stretched, he stated that “selling out of boredom or panic isn’t a sensible strategy now.” It seems to me that Navellier is suggesting the nothing-to-lose concept: if you’ve already suffered a hefty loss in SNDL stock, you might as well stick around for the ride. Something special might be around the corner.
In fairness, Navellier isn’t just speaking out of his other vocal cord, to put it politely. Rather, he does bring up an interesting point about the cannabis specialist’s pending purchase of Canadian liquor retailer Alcanna (OTCMKTS:LQSIF).
Per my esteemed colleague, “This has game-changing potential, as Alcanna is Canada’s largest private liquor retailer. Impressively, Alcanna operates 171 locations predominantly in Alberta under three retail brands.” On paper, it gives SNDL stock another revenue channel. Further, Navellier mentioned that Alcanna has a history of generating strong cash flow.
For me, the biggest impact isn’t necessarily just the substance of the acquisition but what it could do for investor sentiment. With SNDL stock being one of the popular meme or meme-ish trades, anything is potentially justification to bid up shares. Making progress in another retail segment of the adult liberties industry if you will could lead to another massive rally for Sundial.
Still, meme stocks are just as liable to collapse as any other investment category.
SNDL Stock and the Black Market
While Sundial’s Alcanna acquisition makes for interesting headlines, it’s also a risk that prospective investors of SNDL stock shouldn’t ignore. For instance, IBISWorld reported that that the beer, wine and liquor stores industry in Canada “is expected to experience continued, albeit slower, revenue growth.”
As well, the research paper acknowledged the negative impact that the coronavirus pandemic had on Canadian consumer spending. Since our northern neighbor’s economy isn’t as robust as ours, it’s a factor to watch before jumping on SNDL stock based on the Alcanna acquisition.
But more worryingly for Sundial is the persistent strength of the cannabis black market. Indeed, you can make the case that the whole point about legalizing marijuana is to deleverage the botanical commodity from the clutches of organized crime. Per Statistics Canada, “in the first three quarters of 2018 (prior to legalization), the cannabis black market in Canada accounted for approximately $3.8B in retail sales.”
Naturally, a sizable portion or 52% of Canadian users “obtain (at least some of) their cannabis from a legal source (compared to 22% prior to legalization).” Still, that hasn’t stopped many Canadians from obtaining their cannabis illicitly. “In the third quarter of 2019, results from the National Cannabis Survey show that 42% of Canadians had purchased cannabis from an illegal source.”
“Consumers are turning to the black market for a variety of reasons, including but not limited to: higher prices, limited selection, and a scarcity of licensed stores in their area. According to Statistics Canada a gram of legal cannabis costs 55 per cent more than illicit cannabis ($10.30/gram vs. $5.73/gram).”
It seems that until the country gets a handle on its black market, SNDL stock faces multiple risks that go beyond the usual fare.
A Slight Modification
Going back to Navellier’s point about holding onto SNDL stock to see if the positive narratives pan out, it might be worth listening to him. About the only thing I would add is that if you enjoy a recovery to a dollar, I’d be tempted to take it.
Mistakes in the investment world happen all the time. One day, you think you’re hot stuff. The next, Wall Street knocks you off a peg or five. Honestly, it’s a rite of passage. Rarely does the market give you a second chance. SNDL stock may be one of them.
If this recovery happens – and that of course is a big if – you really should consider exiting the trade. Again, mistakes happen to the best of us. But the best of us also learn from the mistakes – they certainly don’t repeat them.
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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 InvestorPlace.com 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.