We are probing for a bottom in the cannabis market, with bulls unsure whether the lows are really in. While the group overall has avoided a retest of the lows, the same cannot be said of Aurora Cannabis (NYSE:ACB).
While the rest of the stock market continues to hum near all-time highs — and individual stock boast incredible one-year returns — the cannabis space just isn’t feeling the love. In every rally there will be laggards, but investors were certainly hoping the “risk on” nature of the market would provide a lift to these risky assets.
Instead of rallying, though, pot stocks are simply doing their best to avoid making new lows. For many, they are at least succeeding in that task — however sad it may be — but not Aurora.
What’s Wrong With Aurora Cannabis?
Canopy Growth (NYSE:CGC), Aphria (NYSE:APHA) and others all plunged to a new low in November. Even though many quickly snapped back out of those funks, they are still struggling to find buyers — just like the entire cannabis space.
That’s likely, however, as tax-loss harvesting weighs on the group. Investors look to lock in losses and move on from their troubled cannabis investments. Plus, they can always sell one dud and rotate into another if they still believe in the long-term opportunities.
Canopy, Aphria and others have avoided taking out that November low. However, Aurora did so during the holiday week. Even though investors had just three-and-a-half trading days to get through that week, buyers couldn’t keep the stock up.
While not typically a busy week, the week of Christmas didn’t go by without drama for Aurora Cannabis. On Dec. 23rd, the company announced its chief corporate officer left the company over the weekend. On Christmas Eve, Jefferies downgraded the stock as a result of the departure.
Finally, while not necessarily outright bad news, it’s certainly not good news. Last year a report suggested Coca-Cola (NYSE:KO) was researching cannabis beverages and looking to team up with Aurora as a result. “We have no plans to enter the CBD market,” the company said on Dec. 26th, in response to a report saying otherwise.
In all, Aurora Cannabis is a struggling stock in a struggling sector. That’s not appetizing.
A lack of profit and positive cash flow doesn’t help matters, while some worry about its balance sheet. Current assets of 588.3 million CAD don’t vastly outweigh current liabilities of 464.5 million CAD. Total cash sank sequentially this year from 535.1 million CAD to 315.9 million CAD to just 191.9 million CAD in the most recent quarter.
Trading Aurora Cannabis
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Aurora Cannabis shares went from one downtrend, to an even sharper downtrend.
After a burst higher in the first quarter, shares continued to make a series of lower highs. When support finally blew out — something we warned investors of in the summer when shares were much higher — the selling really got out of control. After bottoming at $5.38 in August and rallying up to $6.50, shares ran right into downtrend resistance (blue line) and the 50-day moving average.
However, that was the start of an even steeper downtrend (purple line), while the 20-day moving average also joined in as resistance. Last month, Aurora and many others bottomed, with the former dropping down to $2.14.
For others that I’ve covered, I said it’s vital that the respective stock avoids making new lows. However, that’s exactly what Aurora did this week, breaching the $2 mark and hitting a low of $1.90. Now the stock is a no-touch for investors, as even the disappointing ones are behaving better.
For bulls to have a chance, Aurora has to reclaim the $2.15 mark — the November low — then close above the 20-day moving average and downtrend resistance (purple line). Only then can we start to see some positive developments on the long side.
Until then, I prefer a name like Aphria as a speculative long play in the cannabis space.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long APHA.
