A few weeks back, I wrote about a possible secondary catalyst with Sundial Growers (NASDAQ:SNDL) stock. The full legalization of marijuana in the U.S. remains the main one for this Canada-based pot company. But, if its share price dipped further? Buying ahead of it putting its $862.5 million cash position to good use could be another reason to buy the pullback.
Looking back, there may be an issue with this take. Why? Shares probably won’t pull back below current levels (80 cents per share), until it’s clear pot reform isn’t happening in 2021 or 2022.
At current levels, shares trade well above underlying value. With this, it’s still not something you can buy on its fundamentals. Instead, it remains a binary bet on recent debate in the U.S. Congress resulting in legalization within the next year.
Is it a worthwhile wager? Yes and no. The prospects of pot reforms getting signed into in 2021 appear slim. Yet, given its downside risk from here may be moderate, those looking for high-risk, high-potential return opportunities may see it as a bet worth making.
SNDL Stock: For Now, Forget About its Secondary Catalyst
Assuming Sundial successfully puts its liquid balance sheet to work may be a case of wishful thinking. Given its poor track record of capital allocation. But until it shows signs it’ll disappoint yet again in this area, you shouldn’t write off its secondary catalyst panning out.
That being said, as it remains at 80 cents per share, put this secondary catalyst to the side. At present levels, the play with SNDL stock is all about its primary catalyst, legalization. The question now is whether it will play out, either by the end of 2021, or by early 2022.
Checking in on Capitol Hill, the prospects of reforms happening soon appear murky. Senate Majority Leader Chuck Schumer’s pot legalization bill stands little chance of getting passed by Congress, and signed by President Joe Biden, in its current form. This points to further delays in the types of changes needed for companies like Sundial to enter the U.S. cannabis market.
So, why would you still want to roll the dice on SNDL stock, even if legalization in America is seemingly a long-shot? Politicians may remain divided. But “legalize it” is the clear victor in the court of public opinion. A majority of Americans, in blue states and red states alike, support an end to marijuana being considered a controlled substance. It’s only a matter of time before politicians change their currently hesitant tune.
Downside Risk if Legalization Doesn’t Happen in 2021 or 2022
Admittedly, with “a matter of time, there’s a caveat. I don’t mean that, out of left field, Democrats and Republicans join hands, and pass Schumer’s bill when Congress comes back from recess next month. It’ll likely be much more gradual than that. America is likely more than just a year away from these anticipated changes finally happening.
If that’s the case, SNDL stock will soon again head lower. Again, because shares today are only holding steady at today’s prices levels, until further developments make it official that changes to U.S. federal pot laws aren’t happening either this year, or early next year.
If shares enter sell-off mode again, how low could they go? Perhaps down to 57 cents, a price InvestorPlace’s Mark Hake assessed as a reasonable price for the stock. Perhaps even lower, depending on whether those still holding it today head for the exits, the second it’s set in stone Schumer’s bill isn’t getting passed, in any form.
Even so, it may still make sense to buy this legalization lottery ticket, in the hopes of a big payoff. The downside risk may not be so bad. 40-50% possible downside is a lot better than the risk of a total loss. Especially with the potential for it to leap by triple-digit percentage points on game-changing legalization news.
A Binary Bet Worth Taking? It’s Up to You
The odds of pot reform happening in a matter of months rather than years appears remote. Does this mean you should forget about making a binary bet on Sundial Growers? Not necessarily. Shares could take a dive, if Schumer’s bill continues to flounder and Congress, and shows no sign of passing.
On the other hand, it may not be worth it to wait for this stock to fall back to 57 cents (or lower) per share. In fact, while legalization remains top of mind, fast-track or not shares may remain at present levels for quite some time.
If you believe the possible gains from eventual U.S. pot law reform exceed the downside risk with SNDL stock? By all means, consider it a risky play worth cautiously taking.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.