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Sundial Stock Is Sliding, But It Could Rally in the Future

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In my past articles on Sundial Growers (NASDAQ:SNDL) stock, I’ve focused on the U.S. pot legalization angle. That’s mostly because federal legalization of cannabis would result in large gains by SNDL stock. But Congress’ statements suggest that this development may take a long time.

SNDL stock
SNDL stock

Source: Postmodern Studio / Shutterstock.com

So is it still worth buying SNDL stock, which I’ve previously called a “legalization lottery ticket?” U.S. federal legalization may remain years away. Yet, if SNDL stock tumbles further, it may be worth it to roll the dice on this former favorite of Reddit traders.

In the past, the dilution of Sundial’s shareholders, caused by the sale of new shares of its stock, was bad for existing investors. But that did result in the company adding an impressive amount to its war chest ( Sundial’s cash reserves jumped by around 1.1 billion CAD, or about $862.5 million). At today’s prices, however, the stock is still trading at a premium valuation.

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But at a low enough price, like 50 cents per share, SNDL stock may not drop much further, given its large cash position. And its risk-reward ratio at such a level would be favorable, given its potential gains from not only the legalization catalyst, but from putting its cash to work more effectively than in the past.

SNDL Stock and the Recent U.S. Senate Legalization Bill

Admittedly, my bullishness on Sundial Growers has been excessively built on the U.S. pot legalization catalyst. Once this small company enters the U.S. market, it will start making money hand-over-fist.

I’ve argued that legalization, despite the delays, could still happen sooner rather than later. Yet, after studying the issue further, I think that legalization’s prospects are not that strong.

Despite some advances, legalization remains a work in progress. Indeed, the latest bill didn’t exactly get a warm reception, and its chances of passing appear to be slim.

Yet there may be a silver lining. As Cantor Fitzgerald’s Pablo Zuanic put it in an analyst research note, this issue could “prove less divisive in the end.” Unlike other issues stuck in congressional gridlock, the chances of some sort of cannabis reform passing in the near future may still be solid.

In short, legalization is still in play, but the process could still take some time. Yet that’s not the only reason why investors should keep this stock on their radar. If the shares continue to sink, another factor may make them appealing.

Sundial’s Shrinking Valuation Premium

Earlier this year, amid the hype surrounding penny stocks and the initial “meme stock” wave, investors bid up SNDL stock. At that time, its valuation made little sense, given the underlying value of its unprofitable Canadian cannabis operations.

As the months progressed, the shares fell, but they remained overvalued, particularly after the company sold a high number of its shares. Now the stock is much less expensive than it was before.

Don’t get me wrong; at 82 cents per share, Sundial Growers remains pricey. Subtract its $862.5 million cash position from its market capitalization of $1.61 billion, and its enterprise value comes in at around $747.5 million. (It does not have significant debt.)

The stock’s enterprise value/sales (EV/Sales) ratio, based on analysts’ average 2021 sales estimate, is 11 times. Sundial’s valuation is more reasonable than before, yet it’s still rich compared to the stronger pot plays, such as Canopy Growth (NASDAQ:CGC).

If “meme stock” investors continue to develop “paper hands,” SNDL stock could fall to 50 cents per share, a level it reached late last year. At that price level, the shares will be reasonably-priced.

And if Sundial invest its cash in successful acquisitions and ventures, the shares could pop back well above $1 per share again.

Once the Price Is Right, Consider the Shares a Buy

There’s no guarantee that Sundial will invest its war chest wisely. The ventures it’s currently plowing funds into, like SunStream Bancorp, could deliver underwhelming results. That’s happened to the company in the past.

Given the murky waters that Sundial is still in, there’s no reason to pay a premium for SNDL stock. But if the shares fall low enough, the potential gains from either the legalization catalyst or from its new ventures could far outweigh its risk.

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.

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