I recently wrote that Aurora Cannabis (NYSE:ACB) stock isn’t headed for $0, but it’s still too early to buy. However, in the past couple of weeks, multiple Wall Street analysts have updated their outlook for Aurora. Some analysts are getting more pessimistic on the fundamental outlook for Aurora in the first half of 2020. Others are getting more bullish on the potential long-term value opportunity in Aurora stock.
Aurora’s next earnings report is less than a month away. I think it’s still too early to be buying the dip. Besides, there is at least one better option out there for speculative cannabis investors.
Management Is Confident
One of the biggest Aurora bulls on Wall Street is Cantor Fitzgerald analyst Pablo Zuanic. Zuanic recently met with Aurora management. This week, he said he came away from the meeting even more convinced that Aurora’s massive selloff is a buying opportunity.
Zuanic says there are three primary drivers of Aurora’s underperformance in the past month, none of which are real reasons to sell the stock. First, CCO Cam Battley was let go. Zuanic says the market seems to think Battley resigned, but that’s not the case. In fact, he says some more fresh blood would be good news for Aurora.
“We think ACB would benefit from some pruning and from bringing in an outside CEO renown in the investment community for both sound growth strategy and financial discipline (cost/cash flow),” Zuanic says.
Second, traders have been speculating that Aurora may significantly write-down the value of certain assets after a recent property listing price came in below expectations. Zuanic says Aurora’s move to sell non-core assets is part of its cost management plans and should be considered good news for the balance sheet.
Finally, Aurora’s credit facility requires it to have a total funded debt-to-adjusted shareholders equity ratio at or below 0.25:1 by Sept. 30, 2020. Zuanic says all Aurora needs to get its ducks in order prior to this deadline is to generate around $21 million in earnings before interest, taxes depreciation and amortization (EBITDA) per quarter by the September quarter.
Company management and Zuanic himself are confident that goal is still within reach.
“We would make use of the recent pullback,” Zuanic said in conclusion. Cantor has an “overweight” rating and $3.85 price target for Aurora stock.
Balance Sheet Concerns
The same week Zuanic came out with his bullish commentary on Aurora, Bank of America analyst Christopher Carey downgraded the stock to “underperform.” Carey also cut his price target to just $1.15.
Like many Aurora bears, Carey’s primary concern is the company’s balance sheet.
“With [balance sheet] risks to remain a core investment thesis in 2020 in our view, and lingering uncertainty especially on financial covenants, we struggle to envision a scenario where shares have sustainable support,” Carey wrote in the downgrade note.
Carey credits Aurora with taking several steps to improve its balance sheet, including spending cuts, deferred capex and asset sales. However, he says Aurora is still not in position to meet the terms of its credit facility.
Bank of America expects weakness in the Canadian cannabis market to continue throughout the first half of 2020. Without impressive growth numbers to support the bull thesis for cannabis stocks in the near-term, Carey says investors will remain focused on balance sheets.
“Unfortunately, ACB has the weakest in our group, while valuation is still near group high,” he said.
In other words, Aurora has a lot of good things going for it. But at this point of uncertainty and at the current valuation, he simply can’t recommend the stock.
A Better Option Than Aurora Stock
Long-time readers know I’ve been like a broken record when it comes to cannabis stocks. There will likely ultimately be some huge winners in the space in the long term. But there is simply too much risk and uncertainty at this point to be picking one winner.
If you insist on picking one stock, I believe Canopy Growth Corp (NYSE:CGC) is the best pick in the space today. It certainly has a lot less risk than Aurora. Canopy has a strong balance sheet and a major financial backer in Constellation Brands (NYSE:STZ). In addition, I think there’s a good chance Constellation may step in and buy out Canopy as soon as the financial outlook for cannabis stocks clears up.
In the meantime, rather than buying a single stock, cannabis investors should consider owning a basket of at least four or five cannabis stocks to diversify their portfolio. Analysts expect the difficult cannabis market to persist in the first half of 2020. It would be wise for cannabis investors to consider clash flow, debt levels and valuation. In addition to Canopy, investors should consider other top-tier stocks such as Tilray (NASDAQ: TLRY) and Cronos Group (NASDAQ:CRON).
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.