It’s no secret 2019 wasn’t a good one for cannabis stocks. Some investors might be asking the question: Is now be a good time to gain industry exposure with Aurora Cannabis (NYSE:ACB)? Let’s see what happening off and on the price chart to reach a stronger risk-adjusted determination in 2020’s early going.
Last year was a painful one for Aurora stock. Not that the marijuana producer was alone. From former standout Tilray (NASDAQ:TLRY) to the industry’s largest Canopy Growth (NYSE:CGC), or niche players such as Aphria (NASDAQ:APHA), most cannabis companies shares went up in smoke in 2019. For its part ACB stock plunged 67%.
To be clear, much of the bearish price action in Aurora wasn’t without cause. Over the period there were plenty of quarterly misses and losses to contend with. But the real albatross weighing on shares in 2019 was Aurora’s precarious debt situation within a much more challenging cannabis market than investors anticipated. And right now Wall Street doesn’t see 2020 as looking any easier.
Analyst Take on ACB
Late last week two analysts came out with “sell” ratings on ACB. Investment bank Piper Jaffrey cited a poor balance sheet and weak EU sales as risks for the company. The firm also issued a $1 price target for the stock.
The firm warned Aurora Cannabis isn’t likely to achieve positive cash flow until the third quarter of 2021. In the interim, it sees the company’s debt growing by roughly $152 million. Worse yet, the liability is on top the outfit’s existing need to refinance approximately $274 million in debt due August 2021.
On Friday Bank of America Merrill Lynch chimed in with similar reservations. In their estimation, the pot producer’s debt obligations won’t be covered and supersede ACB’s strong position in Canada’s recreational marijuana market.
Aurora Cannabis Stock Monthly Chart
Source: Charts by TradingView
The monthly chart of ACB stock largely supports Wall Street’s sell-side at this juncture. ACB stock is down in nine of its last ten months. Worse and technically, shares have broken most every conceivable layer of bullish price, pattern and Fibonacci support along the way. Aurora is now in strong position to challenge 2017’s key low of $1.38 which followed the initial run-up in shares.
At this time there’s little reason to see this next technical test as having an outcome any different than ACB’s multiple failures in 2019. The bears are in control with no signs of letting up. Moreover, in 2020 I wouldn’t dismiss or discount Piper’s $1 price target and the threat of shares once again becoming an actual penny stock.
Market Maker’s Edge: Despite the obvious admonitions off and on the price chart, I’m not keen on shorting sub $2 stocks. As a former options market maker, I’d stress buying a bear put spread. This kind of position smartly limits and reduces the position’s Greeks while allowing for solid profit potential.
For investors wanting to buck today’s overwhelming bearish warnings, I’d first recommend waiting on monthly chart confirmation a bottom is in Aurora Cannabis. Right now, that would mean waiting until February and a rally above January’s high of $2.27 before considering a position. From there, a longer-dated married put strategy or out-of-the-money long call play due to potential asymmetric risk is where I’d begin looking for long delta exposure.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.