Arguably, the biggest drama in the cannabis space lately has been the federal legalization effort. Many American states have already opened up their marijuana markets for commercial business over the past few years. However, because it remains illegal at a federal level, that has greatly hindered the development of commercial marijuana businesses. In particular, it limits financial activities in the sector. Most cannabis companies can’t borrow money at banks, nor can they deduct their operating expenses from their corporate taxes. This has greatly hampered the development of the industry. Sundial Growers (NASDAQ:SNDL), however, is one cannabis firm that can prosper under the current status quo. And trust me, SNDL stock needs a boost.
The marijuana sector has been in a downtrend for what seems like forever. The Canadian marijuana stocks have long suffered from low profitability as the Canadian market has more supply of cannabis than demand. The American market has seemed more promising. Individual state regulations have kept each state market more unique and allowed individual companies to stake out some protected areas in which to grow.
It appeared this issue was going to end soon. The House of Representatives recently passed legislation which would remove cannabis from the list of federally controlled substances. This would pave the way for marijuana companies to pay normal tax rates rather than egregious ones. It would also give them access to the mainstream banking industry for financing needs. However, it appears the bill won’t make it out of the Senate. The Senate was initially supposed to take up the legislation this month. But now, that timeline has slipped to August. If it doesn’t get done then, it probably won’t happen at all. Elections happen in November, after all, and betting markets have the Republicans as favorites to win the Senate. A marijuana legalization bill isn’t likely to get through a Republican-led Senate.
So, it’s now or never for marijuana legalization, at least for the next few years. And it’s increasingly looking like never. Traders have taken note; the AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) fell to new all-time lows on Monday. It is now down more than 55% over the past year as sentiment has gone from bad to worse.
Sundial, however, could be a secret weapon for marijuana investors. That is because the company has invested heavily in its banking business, which provides financing to other cannabis firms. Famously, Innovative Industrial Properties (NYSE:IIPR) has made a fortune providing alternative financing to cannabis firms through greenhouse ownership. IIPR stock is up more than 800% since it went public. Sundial, with its lending program to other marijuana firms, could fill a similar gap for up-and-coming marijuana firms which don’t have ready access to capital. If marijuana had been legalized in 2022, it would have likely eliminated much of the usefulness of Sundial’s financing arm. With cannabis legalization seemingly unlikely to happen in the near-term, however, it could create a silver lining in giving Sundial more time to ramp up its cannabis banking business. While legalization being delayed again is a negative for the whole industry, SNDL stock should fare better than its peers given the development.
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On the date of publication, Ian Bezek 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.
