Perhaps surprisingly Aurora Cannabis (NYSE: ACB) and other marijuana equities, aren’t benefiting from the shelter-in-place orders sweeping the globe because of the novel coronavirus outbreak. Aurora stock was taking a beating before the outbreak and it hasn’t done better since.
Long one of the knocks on the weed stocks trading on major U.S. exchanges is that these Canadian companies currently don’t have enough exposure to the thriving American marijuana market, a sentiment that’s applicable to Aurora.
Well, Canada is in the midst of its own Covid-19 shutdown and yet cannabis names are being bludgeoned again this year.
Aurora is off more than 69% year-to-date and is lower by more than 92% over the past 12 months. The once-beloved weed stock is deteroriating rapidly. In fact, risk-tolerant traders could have shorted the stock two months and netted nearly 50% over that span.
Residing almost 93% below its 52-week high and with a handle of 67 cents as of the April 16 close, Aurora smacks of value/low price tag trap that isn’t practical for conservative, long-term investors. For risk-takers, however, there may be something to see here, though not much.
A Reverse Split Cometh for Aurora Stock
Readers familiar with some of my work know I’m not a fan of low-priced stocks (they’re usually that way for a reason and the reason usually isn’t good) and I’m even less of a fan of reverse splits.
Aurora is about to travel that path, announcing on April 13 that it will reverse split its stock on a 1-for-12 basis. Based on the April 16 close, the split would take Aurora to just over $8, not exactly Amazon (NASDAQ:AMZN), but enough for a cosmetic improvement.
Thing is reverse splits are almost always executed by companies with other problems and there’s little evidence to suggest these moves foster investor confidence. A study by Colombia University indicates that while these reverses serve to reduce short interest in the underlying stock, there’s not much data proving that the action has positive, long-term benefits.
That said, the reverse split won’t be a nail in Aurora’s coffin. The company has almost $148 million in cash, which is a decent percentage of its $781.57 million market capitalization. Plus, it has access to a $350 million bank credit facility if it needs that capital.
Cash is undoubtedly important in today’s operating environment and the aforementioned data points say near-term ability to survive isn’t a major issue for Aurora, but this may be one of the rare instances where cash position isn’t a reason to buy a stock.
Regarding cash, Aurora management needs to prove it can stop burning through it so rapidly. Management is looking to improve in that department, but it took the traditional approach of laying off staff.
The announcement of a 17% workforce reduction was delivered about two months ago and, as was noted above, the stock tumbled over that period. What that says is analysts and investors need more in the way of cost efficiencies beyond headcount reductions.
Bottom Line on Aurora
For patient, risk-tolerant investors, Aurora isn’t a lost cause. As Cantor Fitzgerald analyst Pablo Zuanic notes, the company has a chance to be free-cash-flow positive sometime next year and that’s nothing to scoff in the cannabis industry.
“We realize these are big assumptions,” said Zuanic. “Still, confidence could return if the company can show significant improvement in cash burn and EBITDA over the next couple of quarters.”
If Aurora starts giving investors a sense that cash burn is slowing and that becoming cash flow positive is a reachable goal, not a far off dream, the stock could be rewarding. It’s a matter of how long that takes and if the cannabis market firms.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
