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What happened

Shares of Alberta-based licensed cannabis producer Sundial Growers (NASDAQ:SNDL) seem poised for a strong start to the week. The pot magnate’s shares rose by as much as 14% on heavy volume in pre-market trading Tuesday morning. 

So what

Starting around the middle of last week, Sundial’s shares — along with those of other publicly traded pot stocks — began heading higher in a hurry. Sundial’s stock has so far gained a whopping 28% over just the last five trading sessions.  

Image source: Getty Images.

Investors have been piling into pot stocks of late in response to the industry’s ongoing wave of mergers and acquisitions. The working hypothesis seems to be that this sizable uptick in business development activity should ultimately lead to a more stable, and perhaps more profitable, marketplace down the road.

Sundial, for its part, now appears to well positioned to be one of the few remaining major players in Canada by the end of the decade. And this rosy outlook is probably the main reason investors have been warming up to Sundial’s shares over the past few trading sessions.   

Now what

Should cannabis investors take advantage of Sundial’s recent upward momentum? While Sundial ought to be in a much stronger position following last month’s announcement it would acquire top Canadian retail cannabis player Inner Spirit Holdings, the company’s near-term valuation still isn’t particularly compelling. In fact, the pot company’s stock is presently trading at close to 25 times next year’s projected revenue. That’s a hefty valuation any way you slice it. So, in short, risk-averse investors may want to pass on this red-hot name for now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.