It can be said that an investor’s maximum threshold for pain is the price they buy a stock minus that number, meaning $0. Aurora Cannabis (NYSE:ACB) certainly made things interesting lately, as ACB stock recently fell to a 52-week low of $1.50.
Consider this headline from Barron’s: “Aurora Cannabis Stock Has Erased 2020 Losses After Analysts Reiterated Support.” That article’s date of publication was Jan. 16 — the same day I penned this piece. The problem is, however, the idea of 2020 losses disappearing a few days into the new year is, well, problematic.
With ACB stock up around 24% over the past week, but still down almost 67% over the past year, logic dictates that only long investors that entered the marijuana name sometime over the last several days find this performance satisfactory.
A bright spot for Aurora is comments from Cowen analyst Vivien Azer, one of the more respected cannabis analysts. She pointed out that at a recent conference she attended, management said it’s working on a debt restructuring plan and plans to employ better controls on expenses and spending. Azer’s price target on ACB stock is $4.61, more than double the shares closed at on Jan. 16.
On other hand, finding Aurora bears isn’t difficult. Not one, but two analysts have $1 price targets on the name. So despite Azer’s encouraging forecast, there are equal amounts of discouragement out there on Aurora.
ACB Stock Is Looking for Catalysts
The issue confounding investors is where Aurora, beyond cutting expenses, is going to source catalysts from this year. With the U.S. market still mostly closed off to Canadian companies, cannabis producers remain dependent on their home market; a country is smaller than California by population.
The 2020 Canadian cannabis thesis revolves largely around Ottawa relaxing burdensome regulations on retail cannabis stores and the recent opening of the derivatives (beverages, edibles, etc.) market. As credible as those issues may be and they are legitimate, they aren’t confined to Aurora and pertain to a slew of the company’s more financially sound competitors.
Moving on from these factors, some of the Aurora’s fortunes this year could boil down to investors behavior. As in, are there enough investors to buy into the cannabis growth story that remains prominent in the media?
Moreover, are there enough investors bold enough or with adequate capital to dollar cost average into losing ACB stock? A study by Professors Brad Barber (Graduate School of Management, University of California, Davis) and Terrance Odean (University of California-Berkeley Haas School of Business) examined the phenomenon of investors behavior on repudiated stocks.
“Real investors are influenced by the media. They tend to buy, rather than sell, stocks when those stocks are in the news,” according to the study. “This attention-based buying can lead investors to trade too speculatively and has the potential to influence the pricing of stocks.”
A separate study by Yale University indicates “attention-grabbing” stocks are more often embraced by retail, not institutional investors. Additionally, its prohibited that the many professional investors that are acting on behalf of high-level clients buy low price tag stocks — of which Aurora certainly is one. This means support for the name is likely to be retail-driven over the near-term.
Bottom Line on Aurora Cannabis Stock
On price alone, ACB stock appears to be a good deal and it may be for risk-tolerant investors. If it can run another 14.5% or so to its 50-day moving average, Azer’s aforementioned price target suddenly doesn’t become that far flung — over the course of this year.
Still, it’s hard to ignore that there are more structurally sound ideas in the cannabis space. And, despite its cheap price, ACB stock isn’t inexpensive by any common valuation metric. In fact, even if it was profitable with current ratios, it’d still be richly valued.
For those prescient enough to have bought last week, it may not be worth waiting for Aurora stock to double. So, take incremental gains until the company proves it’s worthy of a longer commitment.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
