- SNDL stock rallied 22.8% in the past five days on news about a House of Representatives vote on marijuana legalization next week, but this rally may not be sustainable
- The use and possession of cannabis is illegal under federal law in the U.S. and legalization is a game-changer for the cannabis industry
- Investors should wait for the year-end 2021 financial results on Mar. 29
Sundial Growers (NASDAQ:SNDL), which produces and markets cannabis products for the adult-use market in Canada, has seen its shares rally 22.8% in the past five days. There has been news about the House of Representatives voting next week on a bill to decriminalize and legalize marijuana on a federal level.
This news has fueled a strong rally in other cannabis stocks, too. SNDL stock is now at an inflection point, having gains of about 28% in 2022. The rally is impressive, but it may be at risk as the adage “buy the rumor, sell the news” has another critical factor to weigh in on: the upcoming year-end 2021 financial results.
SNDL Stock Rally Is at High Risk
Sundial Growers has gained approximately 46% in the past month. Cannabis stocks usually move in tandem with news related to the broader cannabis industry.
Cannabis stocks remain highly speculative and SNDL stock’s strong rally started on news in February that Sundial has received an extension of 180 calendar days to regain compliance with Nasdaq’s minimum bid price requirement of $1.00 per share.
The company has given assurance to the Nasdaq, implementing options to regain assurance. One viable and effective option would be a reverse stock split. This would decrease the number of outstanding shares and increase the stock price without directly impact a company’s value. A reverse split can signal Sundial Growers is in distress as its financials are far from being strong, losing money and burning cash for the period of 2017 to 2020.
Such a strong rally for a penny stock makes the odds of a selloff highly likely now. Even after this strong rally, SNDL stock is well below the $1.00 per share minimum bid price requirement. It should continue to be highly volatile on news about the House of Representatives voting on a bill to decriminalize marijuana.
House of Representatives to Vote on Decriminalize Marijuana
The use of marijuana in the U.S. is illegal on the federal level. However, recreational use is legal in 18 states and medical use is legal in 38 states plus Washington, D.C.
If the House of Representatives vote and pass the decriminalization of marijuana, this would be a game-changer for Sundial and the cannabis industry. Cannabis firms would be able to sell their products freely in the U.S. market, a material event that is expected to lead to surging revenues.
This marijuana reform bill is very important as it could open the way for cannabis firms to gain access to the traditional banking system. As of now, U.S. banks are not allowed to have cannabis-related businesses as customers.
Notably, the passage in the Senate may not materialize. As history reminds us, a similar bill passed the House in 2020, but stalled in the Senate. The greatest positive news for the cannabis industry and Sundial will be for both the House and the Senate to vote in favor of decriminalization of marijuana. Cannabis stocks may witness a sell-off if the Senate does not give the green light for this reform.
Bottom Line on SNDL Stock
The combination of two major pieces of news creates an environment of extremely high volatility for SNDL stock.
Investors should wait to evaluate the financial results and focus on progress in weak areas, like profitability and free cash flow. Investors monitoring the House of Representatives vote on decriminalization of marijuana should consider that good news may have already been reflected in the recent strong stock price rally.
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On the date of publication, Stavros Georgiadis, CFA 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.