I like to think about outlandish scenarios. The Man in the High Castle (both the book and the TV series), which imagined an alternate reality where the Nazis and the Japanese empire won World War II, intrigued me. And I'm looking forward to Disney's upcoming TV series What If...?, which will explore alternative twists in the Marvel Cinematic Universe.
My hunch is that Warren Buffett views the incredible performance of Dogecoin (DOGE -4.96%) this year as an outlandish scenario. I'd bet that he has a similar take on the steep rise in the price of Sundial Growers (SNDL -6.98%) shares, thanks mainly to the buzz that the pot stock has generated on Reddit.
But what if Buffett had to choose between Dogecoin and Sundial? Which would he pick as his preferred investment alternative? Sure, this is a scenario that wouldn't happen in a million years. However, I think I have a pretty good idea of which way the Oracle of Omaha would lean.
Buffett has been crystal clear about what he thinks about cryptocurrencies. "I can say almost with certainty that they [cryptocurrencies] will come to a bad ending," he said during a January 2018 interview on CNBC. The following month, during a Fox Business interview, he asserted that Bitcoin was "probably rat poison squared."
Don't think that the legendary investor has had a change of heart since then. In 2020, he said, "I don't own any cryptocurrency, I never will." He hasn't mentioned Dogecoin or any other cryptocurrency in public so far this year. However, in February, Buffett's longtime business partner Charlie Munger related that Bitcoin reminded him of what Oscar Wilde once said about fox hunting: It's "the pursuit of the uneatable by the unspeakable." Buffett likely shares Munger's view.
However, Buffett hasn't been a fan of marijuana stocks, either. At the Berkshire Hathaway Annual Shareholders Meeting in 2019, Fox Business reporter Liz Claman asked Buffett and Munger about the possibility that Coca-Cola might partner with a cannabis company. Neither liked the idea because cannabis doesn't have, in Munger's words, a "wholesome image."
Even if Buffett was gung ho about cannabis, he probably wouldn't like Sundial Growers much. The company remains unprofitable. It doesn't have a compelling moat to speak of. And it faces intense competition in Canada while the U.S. market is a no-go for now due to federal marijuana laws.
The lesser of two evils
It's obvious that Buffett wouldn't prefer to invest in either Dogecoin or Sundial Growers. However, in our hypothetical scenario, he'd be required to pick the lesser of two evils. I think the weight of the evidence indicates that he'd choose Sundial.
Buffett has a fundamental complaint against cryptocurrencies such as Dogecoin. He told CNBC in February 2020:
Cryptocurrencies basically have no value and they don't produce anything. They don't reproduce, they can't mail you a check, they can't do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem. In terms of value: zero.
So, his biggest problem with Dogecoin would almost certainly be that it simply doesn't do anything. On the other hand, Sundial grows and cultivates cannabis. It packages cannabis products and ships them to buyers. Buffett might not like the cannabis industry, but it's a pretty safe bet that 100% of the time, he'd take a company that produces goods for sale over an asset that doesn't.
More than a meme
For Dogecoin to be more than a meme, it will have to become more widely recognized as a real store of value or gain a lot more acceptance as a way to purchase goods and services. But Sundial Growers also has some hurdles to jump if it's going to move beyond its meme-stock status. The sizzling share price gains it has experienced this year must be accompanied by underlying business improvement. The company has to establish a clear path to profitability and execute well.
I won't call either of these totally outlandish scenarios. However, even fans of Dogecoin and Sundial would probably admit that there's a significant chance that investors' current fascination with them could fade away over time. What wouldn't be outlandish at all would be for Buffett to be proven right. It happens more often than not.