We’ve Reached the Must-Hold Support Point for Aurora Cannabis Stock

Aurora Cannabis (NYSE:ACB) has been under extreme pressure as the rout in cannabis stocks continues to take its toll. It highlights just how important it is to use discipline when it comes to investing. That’s true for Aurora Cannabis stock, just as it is for a company like Apple (NASDAQ:AAPL).

We've Reached a the Must-Hold Support Point for Aurora Cannabis Stock
Source: ElRoi / Shutterstock.com

Global regulators have been moving to a more accepting approach of cannabis, both recreationally and medically. However, while that may be a long-term catalyst for the industry, it hasn’t stopped the short- to intermediate-term rout this group (including names such as Aphria (NYSE:APHA), Canopy Growth (NYSE:CGC)) has experienced.

While the S&P 500 has now notched new all-time highs, there has been little sign that the pain may be over in this group. It’s a great lesson for looking at stocks with as little emotional attachment as possible. Too much emotion at stake and investors ignore warning signs like we had in the summer.

Valuing Aurora Cannabis Stock

The value behind the cannabis movement is clear — and it’s not exactly a new discovery.

According to an article in the European Journal of Internal Medicine and co-authored by Ethan Russo and Caroline MacCallum:

“Cannabis has been employed medicinally throughout history, but its recent legal prohibition, biochemical complexity and variability, quality control issues, previous dearth of appropriately powered randomised controlled trials, and lack of pertinent education have conspired to leave clinicians in the dark as to how to advise patients pursuing such treatment.”

In other words, the medical industry is not anti-cannabis, but it needs the cannabis space to be handled in a controlled and regulated fashion — just as many would want it. It needs structure. While that may give this space a purpose, cannabis stocks have a different problem at the moment: Valuation.

When times are good and there’s heavy demand for the stock, these names can rally far higher than investors expect. The knife cuts both ways though. In moments where this group comes under pressure, the multi-month or even multi-quarter rally that bulls enjoyed so much can be crushed in a matter of days or weeks.

When it comes to price action, stocks mainly trade on two catalysts, the technicals and the fundamentals.

In the case of Aurora Cannabis stock, the company doesn’t have robust fundamentals, on account of its very high valuation. That means the stock — like its peers — must rely on its technicals for bullish momentum. When the charts are bearish, investors might as well step aside.

ACB stock has solid revenue growth and decent gross margins. But by the time operating expenses are realized, Aurora generates negative net income and free cash flow. Then there’s the balance sheet.

With $350 million in cash and current liabilities of $436 million, ACB stock does not flex the strongest financial muscles. Total long-term debt is $395 million, which could be worse, but still leaves Aurora in a spot where its finances and fundamentals aren’t strong enough to buoy the stock when technical momentum is lacking.

Trading ACB Stock

chart of Aurora Cannabis stock
Source: Chart courtesy of StockCharts.com

It’s true that, short of bankruptcy, a stock can only go so low and that sub-$4, ACB is getting there. Aggressive bulls who think Aurora Cannabis stock is a solid risk/reward down here can go long against the $3.40 low. But remember, just because a stock is down 50%, doesn’t mean it can’t fall another 50%.

Mid-July proved to be a massive turning point. At the time we said shares could plunge once support had given way. Simply put, the tone had changed in Aurora Cannabis stock and not for the better. Shares have been under pressure since.

Just like momentum shifted to the bears, bulls need to see some confirmation on the charts that the momentum is back in their favor.

A double bottom is a good start, but it’s hardly definitive. I need to see ACB stock put in a notable higher low, and hopefully another after that. We need to see it reclaim a major moving average or two, and break its string of brutal downtrends (blue lines).

The technical narrative needs to shift, and that will likely require a catalyst. I don’t know what that catalyst is or when it will come. But if it’s enough to break the bearish trends engulfing ACB stock, then it could shift the momentum back to the bulls. Unfortunately, we’re not there yet.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2019/11/must-hold-support-aurora-cannabis-stock/.

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