Cannabis stocks have been drubbed over the past three months. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ), the largest cannabis exchange traded fund (ETF), is lower by 20% over that period, putting it into a bear market. Some marquee cannabis names have performed worse, including Aurora Cannabis Inc. (NYSE:ACB), shares of which are lower by almost 30% over the past 90 days.
One issue vexing cannabis investors, including those owning Aurora stock, is that even with the sector’s recent swoon, plenty of names still look expensive. In an arena known for mostly unprofitable growth companies (ACB stock is a mid-cap growth name), it can be hard finding value, even when prices tumble.
There is good news for ACB stock investors: the company is one of the more quality names in the cannabis space and, in the eyes of some analysts, one of the more attractively-valued.
“At current prices, we see shares as undervalued. Aurora is focused on becoming a large-scale, low-cost producer by expanding and optimizing its cultivation operations,” said Morningstar in a recent note. “Unlike Aurora’s Canadian peers, it has yet to enter a strategic partnership with a major alcohol, tobacco, or pharmaceutical company. It also does not offer investors any U.S. exposure.”
Other Aurora Stock Catalysts
Aurora stock has been drubbed, no doubt about it, but the shares got some temporary relief to start August. The stock surged 8.21% on above-average volume on Friday Aug. 2 when rival Aphria (NYSE:APHA) reported a quarterly profit, proving to some investors, that yes, cannabis companies can make money.
It may seem to redundant to say that the more ACB stock rises, the better investors do, but there is another reason for that. The more Aurora stock rallies, the more gas gets poured on the shorts’ fire because this stock is heavily sold short. Almost 9% of its float is out on loan to bearish traders.
“A short-term bounce could be on the docket for ACB, too. Currently the security’s 14-day Relative Strength Index (RSI) of 25 sits firmly in “oversold” territory,” according to Schaeffer’s Investment Research. “That being said, a rebound could have short sellers hitting the exits, leading to a potential short squeeze situation. Currently, the 87.2 million shares sold short represent a healthy 8.9% of the stock’s available float. Plus, at ACB’s average pace of trading, it would take roughly seven days to cover all these pessimistic positions.”
For investors that just like good old-fashioned fundamentals and intend to be involved with Aurora stock for the long-term, take heart. The shares currently labor just over $6, but Morningstar’s fair value estimate on the name is $10.
Bottom Line on ACB Stock
One thing Aurora needs to do is continue its diversification efforts away from medicinal marijuana, a market actually expected to contract in the coming years. Additionally, Aurora appears to be eschewing overtures to prepare for broader legalization in the U.S. It is reasonable to say investors would like the company make some commitment to the U.S., even a small one, just to be ready for growth south of its home country.
While Aurora Cannabis Inc. is not involved in the U.S. and is heavily dependent on medicinal weed as a revenue driver, the company is one of the most proficient in this space at managing costs and margins. This should serve long-term investors well.
“We forecast Aurora to reach positive free cash flow generation in 2023, as capital expenditures remain high in the near-term to fund capacity expansion,” said Morningstar. “On average, we forecast capital expenditures 21% of sales through our 10-year forecast period and falling to about 7% by 2028, as we think Aurora has frontloaded capacity expansion through investments and acquisition. This will allow capital expenditures to fall sooner than other companies under our coverage while still allowing Aurora to meet demand growth.”
Todd Shriber does not own any of the aforementioned securities.
