Aurora Cannabis Teaches a Great Lesson on Ignoring the Gurus

I’ve noticed a disconcerting trend lately as more analysts, it seems, are seeking celebrity status by trash-talking stocks and assigning absurdly low price targets. JPMorgan analyst Stephen Tusa’s $5 price target on General Electric (NYSE:GE) stock took center stage in the financial press recently, but a different pair of analysts have ganged up on Aurora Cannabis (NYSE:ACB) stock and I’m questioning whether it’s warranted.

ACB Stock Is a Lesson in Ignoring the Gurus and Trusting Your Instincts
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Immediately after their dire predictions, Aurora stock surged. And so far, the ACB share price has powered relentlessly forward and upward. That might be sheer coincidence, but I must admit it’s been perversely satisfying to watch their forecasts fall flat. On the other hand, it’s too early to judge the long-term veracity of their price targets. Will they find vindication down the road?

Time for a Gut Check

Upon reading the forecasts of Piper Sandler’s Michael Lavery and Bank of America Merrill Lynch’s Christopher Carey, my instincts kicked in. I just felt that their pessimism was excessive. I couldn’t have known that the share price would soon stage an impressive turnaround.

While ACB shares were trading in a range near $1.70, Lavery lowered his rating on Aurora Cannabis from “neutral” to “underweight.” That’s no biggie, as I’ve seen this before and it’s not atypical for analysts to downgrade stocks after a negative price move. However, Lavery then proceeded to test the limits of pessimism by slashing his price target from $3 to $1.

Almost as if the two analysts had discussed it beforehand, Carey similarly battered Aurora with a downgrade from “neutral” to “underperform” and a swift price-target reduction from 4 CAD to 1.50 CAD. While I can’t prove this, it did seem as if the two downgrades caused the share price to go lower — but not for long.

Within a matter of days, ACB stock made a 180-degree turn, shot up to $2.20, and closed the week at $2.13. I’ll try to refrain from mocking Lavery and Carey for picking the exact bottom as a time to issue their doom-and-gloom proclamations, but I hope you won’t begrudge me the gratification of seeing big-bank financial gurus crash and burn from time to time.

A Dissenting View

Not to oversimplify the issue, but everybody knows by now that Aurora has had balance sheet problems. Lavery, for instance, opined that Aurora won’t attain a positive cash flow from the company’s operations until fiscal 2021’s third quarter.

I won’t dispute this, but we’ve been widely discussing this cash flow issue for a while now. Indeed, it’s probably the main reason why the share price has languished for the better part of a year. ACB stock has underperformed even relative to other cannabis names.

In other words, there’s really no new negative news here and the price target cuts don’t sit well with me. Incidentally, I’m not the only dissenter in this regard. Cantor Fitzgerald’s Pablo Zuanic seized the opportunity to “make use of the recent pullback” and took a veiled swipe at Lavery and Carey. He said, “The poor liquidity makes the stock sensitive to downgrades (some done despite the absence of new catalysts/news) and misplaced market chatter.”

I always thought that ACB’s liquidity was fairly decent for a weed stock, but Zuanic has a valid point. Sans justification, the aggressive price-target reductions ring hollow and perhaps a tad opportunistic. Wild predictions can bring publicity, sure, but the reputational damage is a hefty price to pay.

My Takeaway on ACB Stock

To be fair, analysts have a job to do and there’s a place in the financial universe for “unusual” predictions. As 2020 progresses we’ll be in better positions to look back and evaluate the evaluators. And as informed investors, we don’t have to let their sentiment result in our detriment.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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