Since my last write up on Aurora Cannabis (NYSE:ACB) stock, the price action has not gone perfectly my way. But that doesn’t mean that the trade is dead or wrong. In fact, nothing fundamental has changed since then. So today I will make the argument that it has fallen into support so the point is more valid now. And therein still lies opportunity.
For the same reasons as a few weeks ago, if I am long ACB stock I stay in my shares. This is still a good time to bet on the long-term prospect of this industry. I consider this a speculative bet so the high risk trade rules apply.
In defense of my prior write up, the whole equities market fell off a cliff thereafter. So the dip in ACB stock was not due to any fault of its own. Case in point the S&P 500, Canopy Growth (NASDAQ:CGC), Tilray (NASDAQ:TLRY) and the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) charts all resemble that of ACB. So I am still bullish on the stock within the same contexts as before.
So let’s first reset the fundamentals.
ACB Stock’s Fundamentals
The overall thesis for cannabis stocks is hard to kill now. This is much like the story was for Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) in their early stages. Many have tried to short them, but they left a long line of blown up short accounts.
When a concept is so new, the exuberance around it is vague. So even if the naysayers shoot down some aspects of it, there usually are many other positive points that the bulls continue to grasp.
For example, those who doubted Amazon in the beginning assumed that it was a retail trade that competes on margins and that it had no hope of profits. Both accounts sounded like solid bearish thesis, but they were both wrong. AMZN now owns the cloud which powers the new technical world and it’s as profitable as it wants to be.
This is the case with ACB … but not so much from the profitability angle. My point is that there is so much potential from the marijuana stocks — Yes, I called a marijuana stock — that I think it’s short-sighted to assume they are now expensive.
First, I think it’s a mistake to limit the scope of Aurora’s future areas of operations. Second, I think that valuation here is insane, as it is has no bearing on the future. These are growth companies that are trying to establish a new legal existence on Wall Street where there wasn’t one.
Moreover, cannabis is still illegal in the U.S. at the Federal level so the whole sector still has tremendous headwinds. Consensus is that eventually the U.S. will legalize cannabis like Canada and that should fuel another frenzy into the sector and its stocks. This is the sentiment part but it also has an actual tactical effect.
So far, the official interest from traditional companies has been limited. We have seen intrepid companies like Constellation Brands (NYSE:STZ) and Altria (NYSE:MO) invest in CGC and Cronos (NASDAQ:CRON) respectively but the rest maybe be standing by because of the legal concerns around pursuing the potential investments in pot and its vast array of applications.
This brings us to the future potential. It seems that there are as many applications as there are opinions. The recreational use is the dominant magnet to it, but there are legitimate medical uses too. Then there is the in-between zone of edibles and drinkables.
Experts speculate that drinking pot-infused potables will challenge alcohol uses. Experts tout it being healthier with fewer adverse effects than alcohol. This is a concept that has yet to be commercial, but the edibles are already popular so that could serve as an example of the adoption ramp.
All this is to say that the future looks bright. At least it doesn’t look as grim as the bears argue. This is so very different than saying that Aurora stock is a bargain. It’s definitely not from the traditional sense. It sells at a massive multiple to its sales. But again this is not a traditional stock so there is no measuring stick to properly judge value. Besides, for industries this young, current “value” is not the stick to measure viability.
Technically, ACB stock is very tight and a move is coming. It has been setting lower highs and higher lows coming to a point. Moreover, the area around $8 where this battle is ongoing has been a pivot almost since its IPO.
Such zones in contention often resolve themselves with a big move in either direction. But recently the momentum is on the side of the bulls. If ACB closes above $8.25, there is should invite momentum buyers to target $9 per share where the next major battle will happen.
I expect resistance there, but also a much bigger potential rally if the bulls can prevail again. Then rinse and repeat this same action at $10.30 per share.
Of course that the bears could win this tight situation here but we do have proven support that has held through two earnings reports. And this is a strong statement for such a momentum stock inside a very controversial industry.
The bottom line is that the bears have all the reasons to shoot this stock to its lows, yet here it is still up 48% year to date and 400% overall. There is no new development to mar the ongoing bullish thesis. So the default direction is still up and it’s best to bet with the bulls.