SNDL Stock: Sundial Climbs on Default & Political News

Sundial Growers Inc (NASDAQ: SNDL) is flying in the market this morning. The gains are taking place for multiple reasons. First and foremost, the company announced that it issued a notice of default, exciting investors. However, the bigger driver of the gains may be political. Here’s what’s going on:

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Sundial Growers Issues Notice of Default

First and foremost, Sundial Growers said that it has issued a notice of default to Zenabis surrounding certain defaults under the terms of a senior loan. It all started last week when SNDL acquired a special purpose vehicle that owns C$51.9 million of the senior loan. 

The company received a principal payment of C$7 million on December 31, 2020 from Zenabis Investments, a unit of Zenabis Global, in accordance with the terms of the loan. However, the company said that it is addressing other defaults under the agreement. 

On the other side of the coin, Zenabis is disputing the defaults, stating that SNDL is working to force it into a deal. In fact, in a statement, Zenabis had the following to offer:

The Company believes the Senior Lender’s allegations to be spurious and without merit and intends to vigorously defend against what it considers to be an ill-disguised attempt to circumvent a fair and competitive process to acquire the Company by improperly foreclosing the equity of the Company or compelling Zenabis to enter into a transaction with Sundial.

Political Climate Change Could Lead to Tremendous Gains

While the default mentioned above may result in money coming through the doors for Sundial Growers, I believe that the bigger story driving the gains is a political one. In particular, there are two Senate seats that were up for grabs in Georgia. 

Early this morning, according to the Associated Press, Raphael Warnock, a Democrat, won one of the two Senate seats, bringing Democrats closer to a majority. The other seat, being fought for between Jon Ossoff and David Perdue is too close to call. 

However, if Jon Ossoff wins the seat, it will be great news for SNDL and all of the cannabis sector. The fact of the matter is that Democrats plan on making very expensive changes in the near future. To do so, they will have to drive increased tax revenue. 

Many suggest that one of the key ways the Democrats will drive this revenue is through the federal legalization of cannabis in the United States. After all, state-level legalization has proven to drive incredible tax dollars. 

If cannabis is legalized for adult use on a federal level in the United States, SNDL and other cannabis companies in Canada will benefit greatly. After all, due to the legal status of cannabis in the United States, these companies haven’t been able to tap into the largest economy in the world. Should this change, tapping into the United States will be possible. 

Moreover, it could set the stage for an acquisition of SNDL. After all, Sundial Growers is trading at a discount, and offers up plenty of assets in what is currently a highly fragmented market. When the United States legalizes cannabis, the bigger players will likely scramble to consolidate this fragmented market and take control. An acquisition of Sundial Growers would help with these efforts in a big way. 

What Analysts Think About SNDL Stock

While there are plenty of reasons to be excited about Sundial Growers stock this morning, analysts have a pretty negative opinion. According to TipRanks, there are currently two analysts covering SNDL stock. 

Of the two analysts, one rates the stock a Hold, with the other rating it a Sell. 

Nonetheless, I’m expecting for these opinions to change. Considering what’s going on with the Senate runoff elections in Georgia, cannabis legalization in the United States is more likely than ever before, and that will bode well for SNDL stock.  

Risks to Consider Before Buying SNDL Stock

Any time you make an investment, you’re accepting risk, it’s just the name of the game. When it comes to SNDL stock, the most significant risks to consider before buying include:

  • The Company Doesn’t Make Money. Sundial Growers does generate revenue through the sale of its products, but it’s spending far more than it’s earning. Should the funds in the bank not be enough to get the company to profitability, it may look to raise funds through the sale of newly-issued shares, diluting value for investors. 
  • Speculative Play. SNDL is a very speculative play. Much of the value in the stock is based on the belief that the United States will legalize cannabis for adult use relatively soon. Moreover, many are hoping for an acquisition. If one of these two things doesn’t happen, significant losses could be the result. 
  • Penny Stock Risks. Finally, SNDL is a penny stock. The company’s business model hasn’t been proven and it trades with high levels of volatility, adding to the risk of an investment. 

Final Thoughts

Sure, there are risks to consider, as is the case with any other investment. However, in my view, an investment in SNDL stock represents a compelling opportunity. At the end of the day, Sundial Growers is a compelling acquisition target as the larger players look to consolidate a fragmented market. 

Moreover, even if an acquisition doesn’t happen, there’s a strong likelihood that the United States will legalize cannabis relatively soon. Should this take place, SNDL is in a strong position to enter the market, driving strong revenue and pushing to profitability. All in all, SNDL stock is one to watch closely.