The cannabis trade has been gaining a lot of traction and attention lately. Is that attention deserved? Yes. Are the stocks all created equal? Of course not. Even though Aurora Cannabis (NYSE:ACB) has been trading better lately, I would continue to avoid ACB stock.
Aurora Cannabis may be up more than 200% from its October low. However, let’s not forget this is a serial under-performer.
Shares are flat over the last six months. In other words, if you bought in the summer, it took a tripling of the stock price from the lows just to get back to even.
Over the past 12 months, ACB stock is down 50% and over the last three years, shares are off 90%. I’m sorry, but that is not a winning play to me. Who cares if some bottom-of-the-barrel name finds some short-term momentum?
It’s longer-term performance makes it clear that this is not a quality holding. While it may perform better with renewed momentum in the cannabis group, we want to look elsewhere.
Bullish On Cannabis As A Sector
Despite not liking ACB stock on the long side, there are plenty of reasons to be bullish on the direction of cannabis in general. The use of cannabis continues to gain momentum, both medically and recreationally.
That bodes well for a number of companies, as the public’s opinion continues to ease and as regulators take a less-harsh stance.
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As Democrats take the House, Senate and White House, investors have grown optimistic that they will decriminalize marijuana at the federal level. Just this week, Senators Chuck Schumer, Cory Booker and Ron Wyden said they would move for full federal legalization this year.
Obviously that would be a big deal, however Congress and the White House have some other economic and pandemic-related priorities to work through first. Thankfully, there are other catalysts in play aside from federal-level support.
Specifically, CBD and hemp-related products have generated solid interest and momentum. Furthermore, states have been legalizing marijuana on their own: it’s what a majority of the population wants, plus it generates additional tax revenue at a time when it is sorely needed. And it eliminates state resources being wasted on what is, quite frankly, a minor offense in most instances.
While we usually want to put politics aside when it comes to stocks, the truth is, it really impacts this group. The good news is that cannabis is gaining traction on the legal front.
ACB Stock Has Issues
The most recent earnings report saw Aurora Cannabis report an 8.2% dip in revenue to $52.1 million. Losses of 71 cents per share were about double what analysts had been expecting.
This report came in November, which likely has some investors wondering why I even mentioned it. I won’t delve into the quarterly numbers — they are more than two months old, after all — but it highlights that there are still struggles here.
Yes, shares jumped on the result. However, ACB stock quickly pulled back and has yet to take out those post-earnings highs. Further, I think the timing of the report — Nov. 9 — means that surge had more to do with the industry’s rally than the actual company results. Following the U.S. elections and ballot initiative victories for cannabis legislation, pot stocks were on fire due to optimism around what was to come.
The quarterly report wasn’t horrible, but it did reiterate that Aurora is still in a turnaround. More recently, the company raised $125 million by selling 12 million shares at $10.45 apiece.
Now that was actually a good idea. However, there’s a lingering problem in just about everything we’ve discussed so far: Location.
Aurora’s earnings signal that while the business is improving, it’s not a good situation yet. Its capital raise put some cash in the coffers after a nice move in the stock but again, reiterates that this company is struggling financially. And while there’s momentum in the group due to momentum in U.S. legalization, Aurora doesn’t really have a U.S. presence.
So while some of its U.S. based peers may be able to find success and momentum here in the States, Aurora very well may gain very little. Admittedly, it has a path to gaining shares in the U.S., but it’s not all that bright and optimistic.
The Bottom Line On Aurora
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The U.S. cannabis market is moving in the right direction. Heck, even the global cannabis market is moving in the right direction. For the right players, that’s going to create a long-term secular growth story that should be measured in years and possibly even decades.
For Aurora Cannabis well, maybe it shocks doubters and joins in on the party. I hope it does. But until we have more proof that this one can do better, I’m going to avoid ACB stock.
Aurora has been a big under-performer, it’s not profitable and the valuation isn’t cheap. There’s better names to be long in the cannabis space than ACB stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
