August was a nasty month for the marijuana sector. It had its share of bad news, the crushing oversupply continued to mount in the Canadian market, and marijuana stock prices slumped all month. Traders are hoping that September will prove more prosperous. There are some reasons for hope on that front. Tilray (NASDAQ:TLRY), for example, started the month with a 17% jump on Tuesday.
So where does Aurora Cannabis (NYSE:ACB) stock fit into the picture? As long-time readers know, I’ve been negative on the marijuana space for a long time now. Primarily, I don’t like the huge oversupply in the Canadian market. Every month, Health Canada publishes more and more discouraging supply and demand figures for the recreational market. In both dried cannabis and CBD, the available product greatly exceeds customer demand.
Aurora Cannabis Dumps The Green Organic Dutchman
Aurora Cannabis started September on an interesting note. That’s because The Green Organic Dutchman Holdings (OTCMKTS:TGODF) or “TGOD” announced a sizable share offering at 3 CAD. That was a discount from the 3.51 CAD closing price Tuesday for TGODF stock. The TGOD stock offering serves the sole purpose of allowing Aurora Cannabis to dump its position in TGOD and raise cash.
This equity offering should remind investors of two things. One, marijuana companies are continuing to burn through tons of cash and need to raise more of it. And two, make sure you are comfortable with the companies you own. I say that because there will be more excitement ahead, even after this crushing sector selloff.
Aurora Is Making the Right Move
Investors have had mixed feelings about Aurora’s involvement with The Green Organic Dutchman for a while. But I give management credit for a well-played trade. In fact, it served as a shrewd investment.
In early 2018, Aurora Cannabis acquired a substantial chunk of TGOD for just 1.65 CAD per share. It ultimately purchased a little more at higher prices. But on net, Aurora cleaned up on the transaction. It sold off some TGOD stock over the past 12 months at attractive prices. It’s now unloading the rest at 3 CAD for nearly double of their original cost basis.
In 2019, TGOD stock has traded consistently below 5 CAD. Plus, the price is still well above where it bottomed at the end of last year. Thus, Aurora is unloading its stock at a favorable price, at least in comparison to other more beaten-up marijuana equities.
Let’s face it: given current conditions in the marijuana industry, it’s much better to have cash on your balance sheet than in the form of stock at a company that is still in the early stages of commercializing its business.
TGOD has failed to reach significant revenues while most of the industry has already hit that point. Further, critics question the management team’s ability to deliver on its stated goals. Perhaps with that in mind, Aurora pivoted and went in a different direction.
Rather than investing further in TGOD when it had the opportunity, Aurora instead purchased Whistler Medical Marijuana for 175 million CAD. This gave Aurora Cannabis access to 100% organic marijuana supplies without having to rely on its slow-to-production TGOD partner. Who knows, Aurora may even use cash from its successful TGOD stock investment to help fund further development of its competing products at Whistler.
TGOD Deal Adds More Intrigue to Upcoming Earnings
It will be interesting to see if Aurora has any more surprises coming up with their earnings announcement. As I detailed recently, Aurora pulled ahead of its peers by offering an early taste of its quarterly results, which are due out next week. Aurora said that revenues for the quarter will come in strong. That’s despite the general weakness that many other cannabis companies have reported so far this earnings cycle.
And now we have this TGOD divestiture as well. Remember that Aurora already had a decent cash balance. As of March 31, Aurora had 391 million CAD (nearly $300 million) in cash on its balance sheet. It’s likely used a fair chunk of that in operations and growth expenses since then. Still, ACB stock is associated to a reasonably well-positioned treasury.
Thus, it adds mystery to the timing of the TGOD stock sale. Is Aurora about to make another big acquisition? Will management announce a large new growth initiative? Did something go wrong with operations, causing them to want to raise capital from the TGOD sale at this time? Or will they simply let the cash sit on their balance sheet for a while?
The Verdict on ACB Stock
It’s hard to get excited about any of these marijuana stocks right now with the industry facing such drastic oversupply. That said, these investments are deeply oversold. And at some point, they simply have to bounce back, at least in the short run. If you’re looking for such a bounce trade, Aurora Cannabis stock looks intriguing.
ACB stock – based on its U.S. listing – has strong support at the $5 level. With shares trading around $5.60 now, that limits your downside if support holds.
Meanwhile, Aurora Cannabis stock could jump sharply once that support holds and buyers come back into the picture. If you’re looking for a catalyst, let’s see what happens with that upcoming earnings report. As additional cash comes in from the TGOD sale, ACB stock may be ready for another big move.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
