Sundial Growers Inc (NASDAQ: SNDL) stock has been a bit of a rollercoaster ride in the stock market as of late. After tremendous gains, the stock has fallen over the past few sessions, giving back about half of the growth it experienced.
Nonetheless, with SNDL stock up again this morning, many are wondering if its time to buy in and go for the ride. In my view, the stock is ripe for the picking. Here’s why:
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SNDL Strategic Alternatives Exploration
This is the big topic with Sundial Growers. So, it’s where we shall start.
COVID-19 has been a painful pandemic for all. Unfortunately, SNDL experienced quite a bit of that pain. With consumers spending less, the company simply wasn’t selling what it needed to stay alive.
Knowing that financial struggles are likely ahead, management at Sundial Growers announced that it would be moving forward with a strategic alternatives exploration. For those of you who haven’t followed a company through a strategic alternatives exploration, there are a few things companies can do to cure financial struggles:
- Seek the Refinancing of Loans. The idea that SNDL may find itself in more debt after working on its financial structure is not fun for investors to think about. Nonetheless, when a company says it’s exploring strategic alternatives, financial advisors comb through their debts and look for opportunities to refinance to put the company in a better position overall. This is a real possibility should the next two options fall through for the company.
- Sell Assets. In order to make it through times of financial hardship, companies will sell valuable assets, bringing cash through the doors and improving the balance sheet. In this particular case, I believe that an asset sale is highly likely should a full acquisition not take place.
- Sell the Entire Company. Finally, after announcing strategic alternatives explorations, we often see publicly traded companies announcing acquisitions. Ultimately, what would be better for the company and those who own SNDL stock than selling the company at a premium, providing an immediate return to investors?
This is an exciting concept. One of the big three options, if taken advantage of, will provide an immediate return of value to shareholders. Of course, selling assets or refinancing debts would improve the balance sheet, improving the situation for investors as well. Nonetheless, investors are excited about a potential acquisition, which as you’ll find below, is highly likely.
Recent House Vote to Legalize Cannabis Exacerbates the Opportunity
Last week, the United States House of Representatives voted to legalize cannabis on a federal level in the United States. Over the next decade, the United States Treasury will enjoy an injection of $13.7 billion in funding as a result of taxes on cannabis, should the House’s legalization stick. Not to mention, the country will spend $1 billion less on prison expenses for marijuana-related offenses.
This is also a major move for the major cannabis players in the United States and beyond. In fact, it’s exactly what cannabis players in Canada have been looking for. Ultimately, Canadian cannabis growers won’t be able to commercialize their product in the United States until cannabis is fully legal in the country. Let’s not forget, SNDL is a Canadian cannabis grower.
What Exactly Does This Mean For SNDL?
Keep in mind, the House’s vote to pass cannabis doesn’t mean that cannabis is legal in the United States today. However, it does mean that the process to legalize cannabis is beginning.
When cannabis is legal in the United States, it will be big news for Sundial Growers. That is, if the company hasn’t already been acquired. We’ll talk about the potential for an acquisition in a bit.
Nonetheless, if SNDL isn’t acquired, once cannabis becomes legal, it means that the company will be able to get its products over the border and into the United States. This would open the door to a massive opportunity for significant revenue growth that would likely push the company into profits.
Choklat News Hits the Tape
The legal cannabis market excluded edibles for some time. So, many found it interesting when Sundial Growers announced that it teamed up with a company called Choklat to develop and distribute cannabis infused chocolate.
Recently, the CEO of Choklat announced that skids of his product are now leaving the factory and being distributed throughout Canada.
That’s great news for SNDL.
Recently, the company has been walking back its dried flower products and moving into processed products like vapes and edibles. With edibles making their way into cannabis dispensaries in Canada, the company is on the right track, only serving to expand the potential for an acquisition.
Coming Stimulus Helps Pot Stocks Move
The United States is hoping for a bipartisan stimulus package relatively soon. Should the stimulus pass, businesses and consumers across the United States will receive financial benefits. What does this have to do with SNDL?
Not much at the moment, but in the long run, it’s an important story.
As mentioned above, Sundial Growers is a Canadian cannabis company that doesn’t sell products in the United States. However, with the recent House vote to legalize cannabis in the United States, that may change relatively soon. As a result, any news that results in improved economic conditions in the United States may come with long-term benefit to the company and those who own SNDL stock.
All of This Bodes Well for a Potential Acquisition
Ultimately, this whole story boils back to the potential for an acquisition and the company’s strategic alternatives exploration, under which it’s seeking a deal.
Think about it, the United States is likely to legalize cannabis on a federal level soon. At the same time, edibles are hitting dispensaries in Canada, and stimulus may be hitting the United States.
Ultimately, in emerging markets, those who make early acquisitions and consolidate the market tend to become the leaders in the long run. Considering everything in this article, now is the time for big players to start snapping up the little guys and consolidating the industry.
So, in my opinion, the potential for an acquisition at this stage is incredibly high.
SNDL Comes With Risk
The fact of the matter is that no investment in the stock market is made without risk. Sundial Growers stock is no exception. Before you dive in, there are a few risks to consider:
- Risk of No Acquisition. The potential for an acquisition has been a major driver for growth in SNDL stock as of late. Should news come down the line that the company isn’t able to make a deal, investors will be upset and the stock could experience significant losses.
- Potential Need to Raise Capital. Should the company be unable to sell itself or raise money through the sale of assets, there’s a strong possibility that a capital raise will take place. This will lead to dilution, which could result in significant declines.
- Regulatory Risk. Much of the perceived value of SNDL stock is the company’s potential activities in the United States once cannabis is legal in the region. While the House has voted for the legalization of cannabis, there is a long road to run before legalization actually takes place. Moreover, if Canada decided to walk back the edibles news, well, more significant declines could be ahead. All in all, cannabis is a highly-regulated emerging market. In any market like this, there will be regulatory risk.
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The bottom line here is simple. While an investment in Sundial Growers does come with risk, it’s also a potentially lucrative opportunity.
The big story here is the fact that the company is in the middle of a strategic alternatives exploration and the time is right for an acquisition. Should an acquisition take place, investors are likely to see an immediate return of value. If an acquisition doesn’t take place, there are some financial risks to consider.
Nonetheless, regardless of how this goes, I believe the prospects surrounding SNDL stock are positive. Ultimately, even without an acquisition, the company is breaking into the cannabis edibles market in Canada and will likely have an open door to the United States market soon.
While an acquisition would be great, Sundial Growers doesn’t need one to be a successful company in the long run. All in all, SNDL stock is one to watch closely.
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