You don’t have to dig much to find reasons to avoid cannabis companies like Aurora Cannabis (NYSE:ACB). Most prominently, you have the ugly volatility in ACB stock. Although shares performed well for the first calendar quarter, it’s been downhill since the beginning of May. And on the Oct. 10 session, the equity dropped almost 10%.
The other reason has to do with the fundamentals. Almost every weed play has disappointed with their earnings results. Clearly, the honeymoon phase is over. Investors want substantive progress, which the sector is unable to deliver. But with Aurora stock, the underlying organization has another distinct headwind: share dilution.
As several of my InvestorPlace colleagues like Will Healy noted, Aurora’s management has been very aggressive with their growth plan. In order to feed their ambitions, the leadership team simply sold more shares, diluting the overall base. That worked fine when the broader sentiment for legal cannabis bolstered Aurora Cannabis stock.
Today, that sentiment has clearly deflated. And during a bearish phase, that dilution has serious consequences. As Healy wrote:
Moreover, I think traders need to consider the company’s massive dilution. Had an eight-fold increase in shares outstanding not occurred, we might have a stock above $30 per share instead of below $5 per share.
No doubt, this remains a major fundamental risk to ACB stock. However, the biggest impediment to the company right now is the vaping crisis. With nearly 1,300 sick and 29 dead from alleged vaping-related illnesses, both federal and state governments are responding to the issue to varying degrees, from recommendations to outright bans.
Unfortunately, Aurora Cannabis invested deeply into cannabis vaping prior to this crisis, invariably hurting Aurora stock.
Vaping Crisis Might Discount but Not Sink ACB Stock
As ugly as this vaping epidemic is for Aurora Cannabis stock, I believe the biggest victim is the truth. For the past month, the mainstream media has advantaged this crisis with sensationalist headlines. As the old saying goes, if it bleeds, it leads.
But taking a rational approach to this issue, you’ll find an alarming theme. Although it may appear that federal and state health investigators have a handle on the crisis, they don’t. As I argued in a story featuring Cronos Group (NASDAQ:CRON), political leaders are acting decisively on very incomplete information.
At time of writing, we have many possible suspects. These include nicotine, THC, illegally sourced vaporizers, or chemical processes. However, no investigating agency can say for sure what’s truly causing the vaping-related illnesses.
That said, the Food and Drug Administration recommended people to not use THC-containing vape products. Because Aurora Cannabis earlier positioned itself toward cannabis-based vaping products, the negative implications sank Aurora stock.
Naturally, because investors are in panic mode, few are willing to risk a shot with ACB stock. But once the dark clouds fade, a speculative but viable pathway for recovery exists.
I say this because the vaping crisis is almost exclusively an American dilemma. As Vice contributor Alex Norcia pointed out, people are dying from vaping in the U.S., but not in the U.K. Anybody with a hint of intellectual honesty should ask why.
It turns out that the U.K. heavily regulates vaping products. Thus, it’s more difficult to illegally modify vaping devices, or to vape illegal substances. Moreover, British oversight agencies cap nicotine strength to a very low amount relative to U.S. standards.
Thus, we should emulate the British, who are clearly doing something right. This would also help take the sting off ACB stock.
Economic Circumstances Bolster Aurora Stock
Given that vaping stories continue to pile on the negativity, my optimism might seem delusional. But when you consider the economic argument behind vaping and cannabis in general, suddenly, this narrative isn’t so crazy.
Significantly, a divide has formed within the Republican party over President Donald Trump’s proposal to ban flavored vape products. This isn’t surprising in the least. After all, the GOP is about free markets and fewer regulations.
Additionally, a blatant irony is flashing in the background. Trump, who ran largely on his business credentials, is about to impose policies that hurt small businesses. That’s really the last thing he wants to do, which makes me believe he’ll back off. It wouldn’t be the first time he’s flip-flopped, which ultimately supports the case for ACB stock.
Plus, I’m going to go back to a familiar argument. Like it or not, cannabis represents a barely tapped economic engine. Even with the various controversies weighing on the cannabis industry, it’s the fastest-growing job market in the U.S.
Trump can’t ignore these facts. Otherwise, he would impugn the only positive credential that he has. Thus, while it’s risky, Aurora stock might be printing you a once-in-a-lifetime discount.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
