As share trade around $2 per share, Aurora Cannabis (NYSE:ACB) stock is on the precipice. With shares right around their 52-week low, just a little good news could send shares higher. On the other hand, the trend does not look to be Aurora’s friend. With management exits, dilutive debt conversions and a lack of a strategic partner, Aurora is — in short — a hot mess.
Can this dog of the “Cannabisphere” clean house? With low expectations, it won’t take much to drive Aurora stock higher. Yet, given Aurora peers like Canopy Growth (NYSE:CGC) are better capitalized to weather industry headwinds, an Aurora turnaround seems uncertain.
Coupled with continued dilutive transactions to keep the company solvent, Aurora stock is no buy. But, with shares beaten down, Aurora Cannabis could rally on a short squeeze. Let’s dive in, and see why Aurora stock is too much of a question mark to make a long — or short — case.
Could Nelson Peltz Help Drive Aurora Stock Higher in 2020?
We know full well the issues with ACB stock. As InvestorPlace’s Laura Hoy recently discussed, Aurora is paying the price for its aggressive — and expensive — growth efforts over the past few years.
Aurora’s lack of a strategic partner is another key issue; Firstly, capitalization. Canopy and Cronos Group (NASDAQ:CRON) remain far from profitability. However, with Constellation Brands (NYSE:STZ) financially backing Canopy, and Altria Group (NYSE:MO) funding Cronos, both pot names have billions of dollars behind them. So, they can ride out the growing pains of building a scalable business.
Secondly, Canopy and Cronos’ deep-pocketed sponsors provide expertise and connections. Constellation’s installation of their former CFO as CEO of Canopy is a prime example. Putting a proven executive at helm could give Canopy the leadership it needs to reach profitability.
On the other hand, Aurora Cannabis does not have a deep-pocketed partner — but it does have an experienced operator as an advisor. If you recall, Aurora hired billionaire investor Nelson Peltz as an advisor in 2019. Peltz has expertise in improving consumer products operations. Not only as an activist investor in Heinz (NASDAQ:KHC) and Pepsico (NYSE:PEP), but also as an operator. As seen from his success turning around Snapple back in late 1990s.
Cantor Fitzgerald’s Pablo Zuanic believes Peltz could be a stronger catalyst to move Aurora stock. Peltz’s initial consulting role at Aurora was to find a strategic partner in the food, beverage or tobacco industries. But, if Peltz took a more active role at Aurora, the company could get the financial discipline it desperately needs. Zuanic doesn’t think Peltz should take over the board/C-suite per se. However, Peltz could advise the company on finding a new CEO that could put out Aurora’s myriad of fires.
Grasping for Straws to Find Upside, but Definitely Not a Stock to Short
I may be playing “armchair management consultant”, but Zuanic’s idea for Peltz would move the needle for Aurora Cannabis. However, ideas like this could mean we are grasping for straws in terms of an upside catalyst for Aurora stock.
Chances are that Aurora needs to raise more capital. Shares may not go to zero, but dilution could push the ACB stock price to new lows. One would think that makes Aurora stock a great short idea. But, going short now at around $2 per share may be a risky proposition.
For example, Aurora Cannabis stock trades at a lower valuation than Canopy and Cronos. ACB sells at an enterprise value/sales (EV/Sales) ratio of 11.1, according to SeekingAlpha. Canopy trades at an EV/Sales ratio of 21.7, while Cronos’s EV/Sales ratio is 31.9. There’s good reason why Aurora is so “cheap” relative to these competitors. But barring the dilution risk, it’s become harder to say “Aurora is overvalued”.
The other issue is the risk of short squeeze. Short interest in ACB stock is 15.4% of float. This isn’t super high, but if a ounce of good news hits the wires, shares could rally significantly as shorts cover their positions. Look what happened recently with Nio (NYSE:NIO) stock. Despite terrible underlying fundamentals, Nio shares skyrocketed due to a short squeeze.
Steer Clear of Aurora Stock — Long or Short
Despite falling more than 80% from its 52-week high, ACB stock could go lower. Dilution risk remains, and we could grasp for straws believing Nelson Peltz’s could take a bigger role in guiding Aurora to profitability. However, the odds remain against an Aurora stock rebound this year.
On the other hand, it’s too late to short Aurora Cannabis stock. As seen from Nio’s recent short squeeze, fundamentals go out the door when shorts cover their positions. It’s not worth shorting Aurora at $2 when it could easily get squeezed back to $4 per share.
So what’s the play? Don’t buy, or short, ACB stock. Aurora stock may be a more compelling opportunity down the road. But, factoring in dilution risk against the current valuation, all bets are off whether Aurora will deliver upside in 2020.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.