As Legalization Hype Fades, Hold off Buying Sundial Growers Stock

As I’ve said before, Sundial Growers (NASDAQ:SNDL) stock is a legalization lottery ticket. That is to say, shares could see outsized returns whenever the U.S. government legalizes marijuana. The prospects of that happening may look stronger now than they did a few months back. but it’s far from a lock it’ll happen in the coming year.

Outside of that, there’s little reason to buy this pot stock. Even as shares in this “penny stock” have slid back from around 70 cents per share, down to near 50 cents per share.

This company clearly is an “also ran” in its home market of Canada. It’s at a competitive disadvantage to deeper-pocketed rivals like Canopy Growth (NASDAQ:CGC).

And, market leaders like Canopy remain unprofitable. You can imagine how hard it’s been for small operators like Sundial. The company is in the middle of a large-scale turnaround. But, there’s no guarantee results will improve within the next quarter or two.

Sure, with pessimism priced-in, it won’t take much to send shares soaring yet again. However, as retail speculation shifts to heavily-shorted stocks, don’t count on the “Robinhood effect” to save to the day here.

So, what’s the best move? Stay on the sidelines, and hold off buying this half-baked pot stock for now.

SNDL Stock, and the Latest on Its 3 Major Catalysts

There are three factors at play that could help Sundial shares in the coming months. First, U.S legalization progress. Second, the company’s aggressive turnaround. Third, the possibility of the company becoming a takeover target.

So, what’s the latest on each one? Regarding legalization, don’t expect rapid progress out of the now Democrat-controlled Congress. Based on recent comments made by Senate Majority Leader Charles Schumer, decriminalization rather than full-on legalization seems to be the most likely near-term outcome.

How about the turnaround? Not much has changed since I last wrote about SNDL stock. After shifting its business away from wholesale and toward branded products, the company may only need to show modest improvement to get investors excited about its prospects.

Yet, this is far from guaranteed. After years of underwhelming performance, it’s hard to see Sundial magically turn around its ship in a matter of months.

Finally, how’s the situation stand when it comes to M&A (mergers and acquisitions) activity? As InvestorPlace’s Chris Markoch discussed Jan 21, the company’s best bet is to become an acquiree. So far, Sundial’s been playing the role of acquirer, as seen from its recent purchase of senior debt in Zenabis Global (OTCMKTS:ZBISF).

Yet, as our own Mark Hake broke it down Jan 26, Sundial invested money it can’t afford to lose in this deal. If Zenabis ends up going bankrupt, it could have a major impact on this company’s already-shaky financials.

Bottom line: things haven’t gotten better (or worse) for Sundial in the past few weeks. And, while some may be banking on a second round of speculation to move the stock, it’s a longshot.

Why Day Traders Won’t Save The Day for Sundial

With recent news of retail investors putting the squeeze on heavily shorted stocks, some may want to know if this helps Sundial.

Unfortunately, short interest isn’t that high with this penny stock. With only 5.4% of its outstanding shares sold short, there’s no chance of this stock seeing a squeeze on par with GameStop (NYSE:GME).

In fact, with retail speculators diving into stocks with high short interest, like AMC Entertainment (NYSE:AMC), don’t expect the “Robinhood effect” to help Sundial in the short-term. In prior articles, I have discussed how this stock’s Nasdaq exchange listing but penny stock status made it a popular trade on the retail investing app.

But, with day traders focused on “crowdsourced short squeezing,” speculative interest in SNDL stock falls to the back-burner. This may be part of the reason why shares slid even as its underlying fundamentals remain unchanged.

The Jury’s Still Out Whether SNDL Stock Will Surge or Sink

With the recent pullback in Sundial shares, entering a position may look more appealing now, than it did a few weeks back. But, while it’s still slightly cheaper now, it’s still more a gamble than a sound investment.

Until we see the next quarterly earnings release, which will reveal whether its turnaround is panning out or not, there’s not much in motion to send shares higher (or lower) in the near-term. With retail investors currently focused on finding the next Gamestop, don’t expect unexpected speculation to save the day, either.

So, with these factors in mind, what’s the play? Stay on the sidelines with SNDL stock, and look elsewhere for opportunity.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.