- Aurora Cannabis (ACB) burned investors on paper with May’s earnings results
- Cost-cutting, international business and ACB stock price hold promise for investors
- A bearish unwind and technical-based rally makes ACB a speculative buy
Wall Street is getting smoked this week. But pot producer Aurora Cannabis (NASDAQ:ACB) is proving that in a market made up of stocks, there’s always a bull market somewhere. Moreover, it’s one that could still be worth buying into with ACB stock.
The major averages are seeing a rally attempt off year-to-date corrective lows being firmly challenged. For its part the S&P 500 is off 2.65% for the period after having come within 1% of last week’s bottoming hammer candlestick low. But cannabis stock ACB is up nearly 8.50% into Thursday’s session.
So, what gives? Broader worries of retail-driven inflation and hawkish Fed speak appears to have been trumped in ACB stock by news of Aurora receiving certification for a medical grade weed production facility in Germany and assisting the company with a German medical cannabis contract awarded in 2019.
Will the bullishly relaxed behavior continue? Let’s dig into other pros and cons of owning ACB stock and strategies which can allow investors to be more calculated risk-takers.
Not So “Amazing, Eh” Q3 for Canada’s Aurora Cannabis
A past acquisition and grow strategy to be the pot market’s largest producer and weaker consumers craving value cannabis products over higher-margin pot derivatives negatively impacted ACB shareholders as the Edmonton outfit’s Q3 results revealed this past week.
ACB announced an adjusted loss of CA$.85 per share and well above street estimates of a loss of 21 cents. Moreover, its diluted loss amounted to red ink of around CA$1.0 billion on the back of massive goodwill charges tied to a misplaced growth strategy or as Aurora officials laid out, write-offs on property, plants and equipment needed to create a “leaner, more agile organization.”
At the same time, revenues of CA$55.16 million fell around 9% year-over-year and undercut analyst views of CA$66.92 million. Amid increased retail competition in Canada and driving the weak result, adult-use cannabis sales shrank 53% for the third quarter compared to the prior year’s third quarter.
Lastly, Aurora burned through reserves with negative free cash flow of about CA$45 million. It countered the outflow by raising CA$139 million during the March quarter and further reducing shareholder value with dilution that’s soared from just over one million shares to nearly 225 million since 2014.
“Das Ist Gudt”, i.e. The Pros For ACB Stock
Source: Charts by TradingView
The good news? In fact, there was some of that too in ACB stock’s earnings announcement. Aurora did announce its successfully reducing costs which should help turn the company profitable on an adjusted EBITDA basis by next year.
Also, adjusted gross margins during the third quarter grew to 54% versus last year’s third quarter figure of 44%. And while Aurora’s Canadian retail business took a hit, ACB’s international medical business was up 55% year-over-year driven by growth in key markets such as European power Germany and a handful of other countries.
Then there’s the more positive aspect of Aurora’s capital raising. At the end of the quarter the company noted it has around $525 million in cash on hand to focus on higher margin, premium cannabis products, overseas expansion and help support organic growth and opportunistic M&A activity.
The long-term price chart in ACB stock is also revealing conditions which bullish investors can salivate over.
Shares have confirmed a lifetime double bottom pattern roughly seven years in-the-making after ACB stock traded above last week’s hammer candlestick. Coupled with a supportive-looking stochastics setup, bearish street sentiment and decent short interest, in plain English, the technical situation “is good” for contrarian-minded buyers.
Trading Long Exposure in ACB Stock
Today and if it wasn’t altogether clear, ACB stock has its share of pros and cons. And if investors do see the cannabis producer as a buy, it doesn’t deserve to be a core holding. In no shape or form is owning Aurora similar to buying ground floor opportunities in Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) or other great growth stories of the past couple decades. Sorry.
That all said, ACB stock buyers have an entry point where the reward looks to outweigh the risk by a minimum of around 3-to-1. That’s based on purchasing shares near $3.05, booking profits near Fibonacci zone resistance centered around $5.00, if ACB is able to rally, and likewise, taking a loss if the stock falters and takes out the hammer low.
Alternatively, investors willing to accept that sort of risk may want to consider the pricing on an intermediate or longer-term and slightly out-of-the-money $4.00 or even $5.00 call. With this type of strategy it’s possible to increase upside exposure and further limit downside losses with a larger allocation of bullish contracts at a reduced dollar cost to owning ACB shares.
On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.