There’s no point trying to pretend otherwise: 2019 was a disappointing year for Aurora Cannabis (NYSE:ACB) and other marijuana stocks. The first three months were pretty good, but after that it was a painful, relentless downhill ride.
Much of the decline was due to the over-advertised Cannabis 2.0 (the legalization of derivative products like edibles, beverages and vaping concentrates), which was priced into the market too quickly. There was no way that Aurora and its ilk could possibly live up to the hype. Thank goodness that the year’s over and done with, but what lies ahead for Aurora and its investors?
The Harshest Price Target Ever?
There are haters, and then there are haters. I’m talking about absolute rancor, which is what it would take for a respected analyst to put his reputation on the line and give a well-known pot stock a price target of zero.
That’s not a misprint. GLJ Research’s Gordon Johnson gave Aurora a “sell” rating, though he’s certainly not the only analyst to do that. Then he proceeded to declare that “ACB’s equity holds no value” and assigned it an unheard-of $0 two-year price target.
That’s an audacious move on Johnson’s part. Is it an attention-getting ploy? Does he have a blood feud with Aurora CEO Terry Booth? We can have fun and speculate on these matters, but there’s a serious problem here. Someone might take Johnson’s prediction too seriously and initiate a massive short position in ACB stock.
I, for one, don’t recommend doing that. I’m not saying that Johnson told anyone to do that, but the possibility of a 2020 cannabis comeback is very real. I tend to believe that a fundamental mistake is being made here. Just because a stock has gone down 50% doesn’t mean that it’s literally going to zero.
Moving Against the Crowd
My greatest investing successes have come from doing the complete opposite of what the majority of investors are doing — and oftentimes ignoring what the analysts are predicting. Year-over-year, Aurora’s net revenues increased by a whopping 153.6% according to the company’s most recent earnings release, but investors and analysts mostly chose to ignore that fact and beat up on Aurora anyway.
But why? It’s simple. The actual quarterly net revenues of 75.2 million CAD somehow weren’t impressive enough, as the analyst consensus estimate was an eye-popping 94.2 million CAD. That estimate would have implied a year-over-year increase of 217.6% — lofty expectations, to say the least.
Aurora’s net cannabis revenues also improved considerably year-over-year with a 187.8% increase. Not only that, but Aurora’s gross margin on net cannabis revenues was predicted to come to 53.2% but actually came in at 58%. Sometimes analysts just get it wrong, and it’s easy for them to blame the company rather than accept responsibility for their predictions.
I also feel that investors don’t fully appreciate the future impact of the SAFE Act, which if passed would end America’s long-standing restrictions on banks seeking to provide financial services to cannabis companies (in states where cannabis is legal). The SAFE Act has already passed the House of Representatives, and if it passes the Senate, the entire cannabis sector should celebrate with higher stock prices — including Aurora Cannabis.
My Takeaway on Aurora Cannabis
This past year didn’t exactly go as planned, but that’s not sufficient reason to discount Aurora’s potential. If someone wants to give the stock a price target of zero, that’s fine with me; I’ll stick to my thesis that the stock will, in time, go from zero to hero.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
