InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Sundial Growers (NASDAQ:SNDL) stock exploded earlier this year, rocketing to an all-time high of $3.96 on the strength of a r/WallStreetBets run.

However, the situation has changed drastically and as Redditors looked elsewhere, shares cratered.

Sundial certainly took advantage of the situation. It issued a massive amount of equity to shore up its balance sheet for liquidity purposes and seek strategic opportunities.

Sundial Growers is a vertically integrated cannabis company with expertise in both production and distribution. The company's operations are divided broadly into two segments.

The first is the investment arm, Sunstream Bancorp, focusing on lucrative investments in the cannabis industry. The other focuses on product development for adult consumers of marijuana products.

The strategy will certainly help considering the anemic cannabis sales. Net revenue from branded cannabis merchandise improved in the third quarter to 14.4 million CAD. It is an increase of 57% sequentially and a year-on-year increase of 12%, hardly something to write home about.

The earnings report reaffirmed some painful facts. The retail landscape is highly competitive in Canada.

It needs to start focusing more on Europe, the U. S., and Latin America to succeed in the long run. With 1.1 billion CAD on the balance sheet, it has the firepower to change course. However, that will take time, and as the price momentum indicates, Redditors have left the building.

U.S. Cannabis Laws and SNDL Stock

SNDL stock has fluctuated wildly on any news surrounding cannabis legalization in America. The House Judiciary Committee has passed the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act.

This bill would federally legalize marijuana and promote social equity by ensuring those who have convictions for past weed-related crimes can petition to expunge or vacate their records in order to make up lost time with an opportunity at getting into jobs where they had been previously disqualified because of these arrests instead.

The move comes on the heels of an exciting new development for cannabis businesses. The House has passed a bill that will protect banks servicing state-legal marijuana endeavors from federal penalties.

Still, we do not have a firm date when full federal legalization will occur. The cannabis producer seems to be navigating through headwinds right now as Canada's industry shows signs of oversaturation.

Strategic Acquisitions Will Only Help So Much

Yes, the industry is consolidating, and Sundial Growers is among those doing the strategic acquisitions. But it will take time for margin growth to improve once the regulatory reform, industry consolidation, and demand-supply issues in the unstable Canadian market occur.

It is key for Sundial to leverage its competitive advantage in the market by focusing on raising capital and adapting accordingly.

It should also pay close attention internationally and domestically; U.S markets are currently an important foreign destination that can be accessed through this country's domestic industry before it becomes saturated with excess producers again.

From a logistics standpoint, the U.S is an easy market to access, and because of this, it has the potential to be one of the largest markets in the world, if not the largest.

There have been some challenges that need addressing before we can relax our cannabis controls at higher levels. But talks are a high priority now, so things will hopefully come along soon enough. With control of the white house and congress, investors finally see the light at the end of the tunnel.

Investment Arm Is the Future

Sundial recognizes its proceeds from investment operations as income. That means the company is creating a niche for itself as a cannabis investment bank.

The dedicated segment, Sunstream Bancorp, handles most deployments to focus on other areas in need, such as lending and deposits.

Sundial has been on an uphill battle in the last few years. Sundial is investing in aggressive opportunities to generate superior risk-adjusted returns rather than lose cash on cannabis operations to counter this situation.

The company's credit-related investments are turning out to be lucrative for the investor. The annualized return in Q2 was 13%, an excellent number. For this quarter, that number was 14%.

Investors will need to keep up with the news from this segment moving forward. The Canadian cannabis industry is showing signs of oversaturation.

While this sounds negative, it is also an excellent opportunity to branch out into other industries. Sundial's strategy pivot put them in the perfect position to flourish and diversify into other areas while other producers fight it in a tough market.

SNDL Stock Faces an Uphill Battle

With its geographic location and a population of 330 million people, the U.S is a lucrative market for Sundial to tap into, but some obstacles need addressing that can happen.

Understandably, cannabis companies all over the world are suffering due to the stalling of this decision. California alone is the world's largest market for cannabis, giving you some indication regarding the revenue numbers companies can generate if the legislation goes through. Whenever that happens, SNDL stock will skyrocket.

There are other things the company is doing right as well. The investments arm is a step in the right direction, especially with the operations of the company suffering.

Long term, though, the company has to start performing as a cannabis producer.

With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That's because these "penny stocks" are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com's writers disclose this fact and warn readers of the risks.

Read More: Penny Stocks — How to Profit Without Getting Scammed

On the publication date, Faizan Farooque 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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. 

The post Sundial Growers Is Too Dependent Upon U.S. Legalization to Bet on Yet appeared first on InvestorPlace.