Every marijuana stock has a different strategy. For Aurora Cannabis (NYSE:ACB) stock, the strategy is simple. Grow a lot of pot, then find cheap ways to promote it.
This strategy has led to something very unusual for a marijuana stock last fall — a profit. It was a small profit, and it was short-lived, but it means that (for now) the company has an honest-to-goodness price to earnings ratio, 36. As losses in 2019 continue flowing, that will disappear … but it’s something few players have ever had.
That’s because legal pot, a market that opened last year in Canada and is now opening state-by-state in the U.S. (Illinois joined the parade last week), is a fast-growing market that requires investment to serve.
Just like tech stocks, marijuana companies that are serious about becoming market leaders must raise money, take losses and look over the horizon to profit. Aurora is no exception.
The Grow Light is On for ACB Stock
Aurora expects to grow 662,000 kilograms of Canadian marijuana next year and has the capacity to grow a cool million. That’s going to be the biggest harvest in the industry. It’s important because other companies, like Tilray (NASDAQ:TLRY), are reporting shortages of product to sell.
Aurora’s latest loss, C$160 million or 16 Canadian cents per share (the Looney now trades at 74 cents), was blamed on the cost of convertible debentures used to fund its growth. As the stock’s price increases, the cost of those debentures also increases. So it is that good news became bad news.
But there was real good news to report.
- Aurora is building a logistics hub called Aurora Polaris to handle its product.
- Aurora has bought a chemical laboratory, an industrial hemp producer and a medical marijuana brand.
- Aurora made a tender to produce medical marijuana in Germany and began exports of CBD oil.
- Aurora expanded into the United Kingdom and Portugal.
- Aurora brought in Nelson Peltz as a strategic advisor, working on global expansion.
Despite the good news, the bigger-than-expected loss sent the stock down, although the whole group is losing ground right now as Trump’s trade war against everyone escalates.
What’s New for Aurora?
Since the earnings were reported, Aurora has announced a contract to supply medical marijuana to Luxembourg.
Aurora’s latest headline is a marketing agreement with the Ultimate Fighting Championship (UFC), a fast-growing fighting and entertainment organization popular with millennials, covering CBD oil. This is claimed to promote recovery in preference to painkillers.
There is little medical evidence to back up the claim, but the UFC is a global brand. CBD is the tip of the spear for marijuana products. Since it lacks the active ingredient that gets people high it’s legal in many places that still frown on pot.
The U.S. Market
Aurora stock is hampered by a perceived lack of access to the U.S. market, deemed essential by speculators. Canopy Growth (NYSE:CGC), thanks to its alliance with Constellation Brands (NYSE:STZ), is considered the leader there.
Another fact keeping the stock down is a shelf prospectus to issue up to $750 million more stock over the next two years. Some analysts call this bullish, because Aurora can pounce quickly on opportunity without going back to the markets. Others call this bearish since it means the stock can be watered down.
The Bottom Line
Marijuana is a product with multiple markets. There is industrial hemp, medical and recreational pot, as well as CBD oil and other derivatives.
There’s an old military adage that you “get there firstest with the mostest,” which sums up Aurora. Getting product to the market, and promoting the market where it might exist next, are its strategy.
I don’t care for pot stocks, but if you do, this is one worth considering.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.