Throughout the discussions centering on Sundial Growers (NASDAQ:SNDL), the cannabis specialist headquartered in Calgary, Canada, legalization remains one of the key drivers. Obviously, our northern neighbor’s green lighting of the green stuff — the first G7 nation to do so for recreational adult usage — allowed the sector to boom. However, SNDL stock may be a substantial beneficiary if the U.S. decides to loosen its policies, as well.
Just to recap, the Agriculture Improvement Act of 2018 — colloquially known as the farm bill — legalized hemp-based products like cannabidiol (CBD) at the federal level. Essentially, these products feature less than 0.3% delta-9-tetrahydrocannabinol (THC), the cannabinoid molecule that represents the main psychoactive ingredient of marijuana. In a way, you can look at CBD as weed that doesn’t get you high.
Now, the full-powered version of cannabis remains a federally controlled substance, on par with other notorious narcotics. Despite Americans overwhelmingly supporting marijuana legalization, many politicians have been reluctant to take this major step. But even if they did, the move wouldn’t necessarily spell a good time for SNDL stock.
Aside from the competition issue, Sundial Growers would have to worry about pricing pressures from the black market. As a Politico article earlier this year acknowledged, despite certain states legalizing marijuana, a burgeoning black market imposes a relentless rivalry on the legal players. Unfortunately, the illegal growers aren’t paying taxes and fees, allowing them to undercut businesses which are playing by the rules.
If that wasn’t bad enough, the soaring inflation rate will almost certainly discourage cannabis purchasers. True, we Americans focus on the inflation of the dollar. However, rising prices are impacting several countries, which means that Canadian cannabis customers can’t completely ignore the temptation of black-market weed.
While SNDL stock offers some relevance — for instance, limited evidence suggests low-dose THC can alleviate stress — under an ecosystem of strained household budgets, illicitly sourced cannabis may simply be too enticing. Therefore, investors should be cautious about getting too heavily involved with Sundial.
On the date of publication, Josh Enomoto 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.
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