Pot stocks have been on a tear in 2019. Across the board, the Big Four pot stocks are all up big year-to-date. Cronos (NASDAQ:CRON) has led the charge, more than doubling in a month. Canopy (NYSE:CGC) isn’t too far behind, up 82% year-to-date. Aurora (NYSE:ACB) stock is up nearly 50%. Tilray (NASDAQ:TLRY), the worst performer in the group, is still up 9% in 2019.
Long term, this rally in pot stocks will persist, and many of these pot stocks will transform into multi-baggers. But stocks don’t go up forever in straight lines, and the past month’s straight-line-up rally in pot stocks is due for a correction. Many pot stocks are overbought here, and many are also closing in on near-term overvalued territory.
Except for one: ACB stock.
By my numbers, Aurora Cannabis stock is neither overbought nor near-term overvalued. Thus, while pot stocks may broadly experiencing a pullback in February before continuing on a multiyear uptrend, one name in the group that could be largely resilient to near-term weakness is Aurora.
That makes ACB an attractive pot stock to buy here and now. As readers of my work know, Canopy is my favorite pot stock. But, if I was looking to increase my cannabis exposure right now, the best option would be to buy Aurora Cannabis, given relative undervaluation and favorable technicals.
There’s plenty to like about ACB stock from a fundamental, valuation, and technical perspective.
On the fundamentals side, Aurora is right up there with Canopy in terms of sales leadership in the cannabis market. Indeed, Aurora is expecting second-quarter sales of $52.5 million. Annualized, that’s about $210 million, which would give Aurora the biggest annualized sales base in the cannabis space.
This sales leadership is a byproduct of robust production capacity and a broad product portfolio. On the production side, Aurora has a production capacity of roughly 150,000 kilograms of cannabis per year. That number is expected to more than triple to 500,000 by mid-2020. Also, Aurora is behind the top four best-selling cannabis products in British Columbia, and has over 30% market share in Ontario.
Gross margins are also high. Last quarter, Aurora posted 70% gross margins. That is near the top of the entire cannabis industry, too.
On the valuation side, ACB stock features a market cap of just over $7 billion. Canopy, the only other cannabis company with similar revenue and profit levels, is valued at more than twice that amount ($16 billion market cap). Granted, Canopy has a big $4 billion cash investment from Constellation Brands (NYSE:STZ). Aurora has debt. Still, this wide divergence in market value seems too wide.
On the technical side, ACB stock — while up big this year — isn’t technically overbought here. Both CGC and CRON stock have Relative Strength Index readings that are well over 70, which indicates near term overbought conditions. ACB stock has a RSI reading around 60. Thus, the stock still has a ways to go before it’s overbought.
Overall, there’s a lot to like about ACB stock here. You have a market and profitability leader trading at a huge discount to peers with favorable technical characteristics. That’s a near-term winning combination.
The one big thing not to like about Aurora Cannabis stock here is that the company does not have the same support as other headline cannabis players. Namely, other pot stocks have scored huge investments from large alcoholic beverage and tobacco companies, which have shored up their balance sheets and given them the necessary resources to aggressively grow in the rapidly expanding cannabis industry.
Aurora has no such investment. Instead, they are tapping into the debt markets to fuel growth, and that dilutes shareholders and profits.
Consider this. Canopy has $4 billion on its balance sheet from Constellation Brands. Cronos has nearly $2 billion from Altria (NYSE:MO). Aurora just issued $350 million in 5.5% senior convertible notes due 2024. Thus, not only does Aurora have significantly less resources to grow than its peers, but the company is also getting those resources from the debt markets.
That’s an unfavorable position for ACB. As such, until it scores a big cash investment from a much larger consumer goods giant, Aurora Cannabis stock will remain depressed relative to its peers.
Aurora Cannabis stock is depressed relative to other pot stocks because of its lack of a big cash investment from a big alcoholic beverage, tobacco or consumer goods company. So long as Aurora doesn’t have that big investment, the ACB stock price will underperform its pot stock peers in a long term window.
But, in the near term, it should outperform given relatively favorable fundamental, valuation, and technical characteristics. As such, ACB stock may actually be the cannabis sector’s best performer in February.
As of this writing, Luke Lango was long CGC, CRON, and ACB.