Cannabis stocks have been hurting this month, and Aurora Cannabis (NYSE:ACB) stock is no exception. Shares have been pounded since support gave way in July, leaving many investors wondering what to do with ACB stock. The cannabis space is tough, as volatility has elevated as the overall market falls under pressure.
The space is speculative, to be sure. And when market-wide volatility picks up, speculative names are in the crosshairs.
It’s not just ACB stock that’s struggling either. Cronos Group (NASDAQ:CRON), New Age Beverages (NASDAQ:NBEV) and Tilray (NASDAQ:TLRY) have all been besieged. Canopy Growth (NYSE:CGC), a name I and many others considered the “blue chip” in cannabis, has also floundered.
So, where does all of this seesawing action leave Aurora Cannabis stock?
Valuing Aurora Cannabis Stock
There are several attractive elements to the cannabis space. First, worldwide regulation has been easing toward marijuana use, both medically and recreationally. Whether that’s in Europe, Australia, Canada or the U.S., we’re seeing more open-mindedness to the benefits of cannabis.
As acceptance grows, so too does revenue. ACB, TLRY, CGC, CRON and others are experiencing explosive revenue growth. Seeing year-over-year sales double, triple and even quadruple in some cases surely is attractive to long-term investors.
Finally, there are mergers and acquisitions. Constellation Brands (NYSE:STZ), Altria (NYSE:MO) and others have plunked down billions of dollars in investments, with more companies on the sidelines waiting to make investments or collaborate. That’s surely a catalyst as well.
But it’s not as if these positive factors have gone unnoticed. It’s driven many of these equities to huge valuations relative to their fundamentals. In the case of ACB stock, Aurora Cannabis has a market cap of almost $6 billion.
That’s despite revenue of just 65.1 million CAD last quarter, a record result. While it’s good to see Aurora Cannabis moving in the right direction, it’s hard to deny that the valuation is quite high.
While we’ve seen an uptick in cash, we’ve also seen a steady increase in liabilities. Still though, with current assets and total assets both outweighing their liability counterparts, Aurora Cannabis has some staying power. However, even though a balance sheet may be okay in the present, the fundamentals need to improve it over time, not harm it.
With negative operating income and free cash outflow, Aurora Cannabis will weaken over time unless it can plug some of those holes.
Trading ACB Stock
For now, Aurora Cannabis stock is trying to put in a bottom. Shares made new lows on Monday August 26, before reversing and closing higher on the day. That’s good price action for the bulls, but it’s only a short-term move.
More than a month ago, we said ACB stock was setting up for a midsummer plunge. That was near $7, when support gave way and the descending triangle formation was in full force. After hitting $5.53 this week, shares were off more than 20% from those support levels.
In short, the charts have not been doing well. Bulls need a few things to happen before Aurora Cannabis stock starts to look healthier.
First, shares need to get above and stay above the 20-day moving average. This metric was a notable support level during ACB’s ascent, and it’s been a potent sell signal during its fall. You can see where this moving average went from support to resistance, highlighted by the orange arrow on the chart.
Above the 20-day moving average brings up investors’ second task with ACB stock: clearing downtrend resistance (blue line). Over both these levels brings up the 50-day moving average and possibly prior support at $7.
If ACB stock can’t start making bullish strides, the bearish momentum is likely to continue. In short, rallies into resistance will likely draw in sellers until ACB can prove otherwise. If shares continue lower, look for channel support to continue buoying the name, and see if $5 brings any sort of reprieve.
Until the markets steady themselves, cannabis stocks may have trouble finding sustained rallies.
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.