Despite the market’s hearty rally last week wasn’t a good one for Aurora Cannabis (NYSE:ACB) because Aurora stock is stuck in a technical downtrend.
Even as a number of stocks in the cannabis industry were bouncing higher as well, the recent underperformance vs. the overall market has investors wondering if Aurora is set to breakout or breakdown.
Late last week, Stifel analysts initiated Aurora Cannabis stock with less-than-enthusiastic coverage. They slapped a hold rating and a C$10 price target on ACB ($7.47 USD). From current levels, that implies a slight downside but not much. At the very least, some investors may read that as a positive note. After all, it could have been a sell rating with a target that implied a big downside.
Still, it doesn’t paint the most optimistic picture. The analysts argue that Aurora’s “international medical-use growth opportunities are limited outside of Canada and Germany.” They remain cautious as ACB due to execution concerns and the company’s “lack of definitive strategy.”
So what do the charts say?
Trading ACB Stock
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Shares of Aurora stock are stuck in a tough downtrend (blue lines), with channel resistance squeezing it lower. Last month the 20-day and 50-day moving averages began acting as resistance, while Aurora is flirting with losing its 200-day moving average as well.
Once ACB stock lost the $8.25 to $8.50 area last month, more selling pressure took hold. This area was resistance from October through March, but after turning to support it looked as if it would buoy the name going forward. Keep in mind, Aurora had just about doubled from the start of the year through mid-March.
So what now?
I’m watching a few key areas in the short term, starting with the 200-day. If this area turns from Q1 support to Q2 resistance, there will most likely be more downside to Aurora Cannabis stock. If ACB can reclaim this level, it will set up an important test with resistance. The only problem? Resistance sits between $8.10 and $8.60 and is trending lower. That’s where investors will find the 20-day and 50-day moving averages, as well as channel resistance.
Below the 200-day, and the 61.8% retracement at $7.29 will be an almost immediate focus. If it fails as to boost Aurora Cannabis, channel support will soon be called upon near $7.
So is a breakout or breakdown coming for ACB stock? Until we first see how it handles some of these key levels, we won’t have our answer, unfortunately. However, breaking out of this channel can trigger a big move in either direction. For that reason, these are must-watch zones for Aurora stock investors. Until they give way, ACB can remain channel bound.
Bottom Line on Aurora Stock
I consider the cannabis space industry very interesting. On the one hand, it’s moving impressively fast with regulation, public acceptance and corporate revenue. That’s not to say there won’t be bumps in the road, only that it’s moving very quickly in the right direction. That said, despite this explosive growth, it’s very much a long-term play. That’s because the valuations are pretty large already.
Take Aurora Cannabis for instance.
ACB stock commands a market cap of almost $8 billion, while full-year estimates for fiscal 2019 revenue stand just under $200 million. That leaves Aurora trading at 40 times this year’s revenue. Although on the more bullish side, estimates also call for $500 million in sales next year. That’s a more palatable 16 times current sales but would also assume that the stock price stays flat over the next 12 months.
So in a way, Stifel’s coverage makes sense. The stock has upside provided a few things continue to play out. More states and countries need to continue down the regulatory approval path, while Aurora stock needs to execute on its opportunities. Lastly, it needs to show a path to profitability, while continuing its stunning revenue growth over the next few years.
That really goes for more companies besides Aurora stock too. Almost all cannabis plays need to. That includes Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY), Aphria (NYSE:APHA), Cronos Group (NYSE:CRON), New Age Beverages (NASDAQ:NBEV) and others. Let’s see if they can deliver.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
