Aurora Cannabis (NYSE:ACB) saw its stock take a nosedive as it chilled out after weed gained legal status. This sentiment overcame news such as a move to the New York Stock Exchange and moves into new foreign markets that would have likely bolstered ACB stock a few weeks ago.
However, ACB has also begun to take a leadership position in the Canadian cannabis industry. Also, with legalization fever sweeping other Western countries, this industry should remain in growth mode for years to come. Hence, investors should probably look at the massive drop in ACB stock as a buying opportunity instead of seeing it as the end of the marijuana boom.
Aurora Cannabis Stock Chilled Out After Weed Became Legal
Like most Canadian marijuana stocks, Aurora has found itself the victim of a variation of “buy the rumor, sell the news” phenomenon. Since the day before marijuana legalization became official in Canada, ACB stock has lost more than half of its value.
Still, Aurora and its peers had reached valuations that earned comparisons to the dot-com bubble of 1999-2000. Also, even at half price from three weeks ago, Aurora Cannabis stock has not become cheap. Analysts predict a full-year profit for the next fiscal year. Still, that takes ACB to a forward price-to-earnings ratio of about 50 based on next year’s earnings.
Warren Buffett likes to quote his mentor Benjamin Graham who said, “in the short run, the stock market is a voting machine, but in the long run, the stock market is a weighing machine.” With legalization now official, investors have begun to apply the weighing machine view to ACB stock. Indeed, in the long run, it will more closely mirror S&P 500 averages and trade at comparable multiples to equities such as Constellation Brands (NYSE:STZ) or Altria (NYSE:MO).
The Hype Will Likely Move to Other Countries
However, I think the weighing machine view will see delays in taking over. For one, Canada has not produced enough weed to keep up with demand. Hence, any product available will command premium prices in the near term. Secondly, the legalization wave has begun to hit other Western countries. Although homegrown companies will also emerge in those countries, Canada’s first-mover status on cannabis gives ACB and Canadian peers such as Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) industry leadership.
Many also believe that the U.S. will make further moves to legalize medical cannabis nationwide following the midterm elections. Such a move will bolster the advantage Canadian firms enjoy. Similar steps have begun in other Western countries. Aurora Cannabis just received approval to ship its product to Poland.
Third, Aurora remains the third-largest cannabis company in Canada, behind Tilray and Canopy. Over time, the industry will consolidate. I believe Aurora will survive as more Canadian cannabis firms sell to larger companies or close their doors. Such moves will further solidify the position of Aurora Cannabis stock within Canada and abroad.
For these reasons, I think the recent fall in Aurora Cannabis stock has become a buying opportunity. Admittedly, it takes courage to step into an expensive stock that lost half of its value in 2.5 weeks. However, ACB will turn a profit soon, and valuations have fallen out of the stratosphere. Moreover, ACB stock will operate from a first mover position when legalization hype sweeps other Western countries. These factors should spell a return to the pre-legalization hype.
The Bottom Line on ACB Stock
Despite the swoon in Aurora Cannabis stock, Aurora will likely benefit as legalization hype sweeps other countries. ACB lost about half of its value within about 2.5 weeks following legalization. However, this drop has also taken the stock to more reasonable levels.
Moreover, ACB will begin to earn a profit soon. Also, with more countries moving to loosen cannabis laws, Aurora and its Canadian peers will enjoy a first-mover status. Increased demand throughout the developed world should bolster growth in Aurora for years to come.
With its forbidden status gone, marijuana hype will probably soon chill out within Canada. However, with legalization hype at new highs across much of the world, ACB stock should enjoy highs in the months and years ahead.
As of this writing, Will Healy did not hold a position in any of the aforementioned securities. You can follow Will on Twitter at @HealyWriting.