For Canadian-based cannabis producer Aurora Cannabis (NYSE:ACB), the year has gotten off to a spectacular start. Note that the shares have logged 76% increase. But then again, Aurora Cannabis stock has actually been making up for lost ground. Keep in mind that it still hasn’t reached the highs achieved back in October.
Yes, when it comes to cannabis stocks, you need to have a very tough stomach as the volatility can be wrenching. Just look at the charts of other companies like Tilray (NASDAQL:TLRY), Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC). They are definitely all high-beta plays.
So with Aurora Cannabis stock, what now? Can the good times continue? Or should investors be cautious? Well, as should be no surprise, the valuation is at nose-bleed levels. Consider that the price-to-sales ratio is well north of 50X and the market cap is over $9 billion.
But this is probably not much of a factor. There are a variety positives that should keep up the momentum, at least for the short-term.
A Closer Look at Aurora Cannabis
First of all, ACB stock is getting a nice boost from the legalization of recreational marijuana in Canada. The company has the advantage of massive scale in the market, which is expected to get bigger and bigger. The current run-rate is 120,000 kgs and this is expected to reach above 150,000 kgs by the end of the current quarter.
Next, the medical business continues to show traction, with revenues of $21.6 million in the quarter. A key part of the strategy has been to move aggressively into international markets, such as Poland, the Czech Republic, Luxembourg, Mexico and the United Kingdom.
ACB also has continued to invest heavily in its drug pipeline. For example, the company has 40 clinical trials and case studies that have been completed or are in progress as well as seven in pre-clinical trials.
But there is another point of leverage – that is, cannabidiol (CBD). This includes a group of compounds in the sativa plant that do not produce a high but have actually demonstrated powerful therapeutic effects.
The reason CBD is so important right now is the passage of the Farm Bill in 2018. It declared that this was no longer an illegal substance. In other words, this should mean the emergence of a large market, and fast. According to research from the Brightfield Group, the spending in the U.S. could hit $22 billion by 2022.
As for ACB, it has been focusing on its CBD business. To this end, it has invested in hemp production in areas like the Radient facility in Edmonton, which is estimated to produce as much as 10,000 kgs per day. The company has also been bolstering its product line, especially in the wellness category. And ACB has been making smart acquisitions, such as purchasing Argopro (it’s Europe’s largest hemp producer).
Bottom Line on Aurora Cannabis Stock
But perhaps the most important development for Aurora Cannabis stock is the company’s announcement that Nelson Peltz has come on board as a Strategic Advisor. He has a sterling resume as a private equity investor (he is the CEO and founding partner of Trian Fund Management), with a focus on consumer product companies like PepsiCo (NASDAQ:PEP), Procter & Gamble (NYSE:PG) and Mondelez (NASDAQ:MDLZ).
He said in a press release:
“I believe Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain and is poised to go to the next level across a range of industry verticals. I also believe that Canadian licensed producers, and Aurora in particular, are well positioned to lead in the development of the international cannabis industry as regulations evolve, with a strong, globally replicable operating model.”
But Peltz will be instrumental in guiding the strategy of ACB and should be essential in finding major partners. We’ve already seen giants like Altria (NYSE:MO) and Constellation Brands (NYSE:STZ) invest billions in the sector. And it seems like a good bet that Peltz will try to pull this off with ACB.
Again, the stock price is likely to continue to be volatile. But so far, the momentum looks solid as there are multiple drivers like the Canadian market, the healthcare business and CBD opportunity.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
