Should You Avoid Aurora Cannabis Stock?
In equity markets, there are stocks that are oversold and there are stocks that get beaten down because they have lost all value or are fundamentally weak. Cannabis nvestors sometimes mistake the latter for the former. They assume that beaten-down stocks are having a bad run, and it is only a matter of time before the markets recognize their true value. Unfortunately, we’ve seen this unfold with a few cannabis stocks like Aurora Cannabis – but should you avoid Aurora Cannabis Stock?
Many retail investors try to follow Warren Buffett’s Principle to ‘buy when there is fear’. Unfortunately, investors tend to keep waiting for a rally that never comes and this can spell significant capital loss.
Canadian hemp stock Aurora Cannabis (NYSE: ACB) is a prime example of a fundamentally weak cannabis stock. It was once the darling of the cannabis investor. Aurora was supposed to lead the world when it came to marijuana cultivation, sales, and subsequent market gains for eager investors.
Aurora had access to over a dozen markets outside Canada and was supposed to produce 600,000 kilos of marijuana every year through its 15 production facilities. But Aurora Cannabis consistently misses estimates, including recent projections that it provided just a month prior to announcing results, and continues to have marquee advisors exit the company.
Will the Presidential Election Make a Difference for Aurora Cannabis?
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Aurora moved up by nearly 17% on November 2, 2020, to close at $4.73. A major reason for this price bump is the assumption that the Democratic Biden-Harris alliance is set to win the U.S. Presidency.
The Democrats have a clear plan for marijuana legalization. They want to legalize it for medical use, support states in setting up their own pot policies, and will drop it from the Schedule I illegal narcotics list.
These are all great measures for marijuana companies and cultivators but good policies can’t necessarily revive a struggling company and Aurora’s troubles certainly haven’t stemmed from bad government policies.
The company simply hasn’t given investors confidence because it is unable to meet targets it sets for itself, and it has lost billions of dollars in goodwill because it has drastically overpaid for acquisitions.
To give an idea about the amount of investor wealth this pot stock has destroyed, consider this: Its 52-week trading range is between $3.71-$47.04.
Aurora Cannabis has lost almost 90% of its value in the last 12 months.
Will Aurora Cannabis Make A Comeback?
When a company has lost so much value, it’s easy to believe that the only way for the company is up and this is simply not the case with Aurora Cannabis. The company has a terrible track record of depleting investor capital through writedowns and share dilutions.
In September, the company announced that it would write down $1.4 billion (CA$1.8 billion) of goodwill impairment charges on previous acquisitions like Medreleaf (CA$2.11 billion), Cannimed Therapeutics (CA$712.1 million), and ICC Labs (CA$137.2 million).
It was overly reliant on the Canadian-recreational pot market. In fact, the company had to reverse split its stock in a 1-12 ratio to avoid getting delisted on the NYSE. Any company that executes a reverse split is not looked at favorably by the markets. Most times, a reverse split means that the company’s fundamentals are broken and its business model simply isn’t working.
Thus, Aurora had to struggle to get capital infusions. Banks didn’t want to lend to the company so it kept selling its stock. In May 2019, Aurora’s board permitted the company to raise $750 million via a stock offering. It has raised $400 million and in early 2020, the company’s Board authorized another offering of $350 million.
In May 2019, when Aurora got billionaire activist investor Nelson Peltz as an advisor on board, hopes were high that Peltz would play a key role in getting a tie-up with a well-known brand in the food or beverage space which never materialized.
Aurora’s Founder and CEO Terry Booth resigned in February 2020. Michael Singer who replaced him as the pot company’s interim CEO left in September, leaving Miguel Martin in charge. Peltz has since resigned from his advisory role as well.
Bottom Line: Should I Buy Aurora Cannabis Stock?
Aurora has shut down five small cultivation centers, sold a 1 million square feet greenhouse facility, and ceased construction in two large projects. Its capacity has come down to 220,000 kilos of weed a year from 600,000 kilos. It has also relieved itself of a lot of loans it was carrying.
The company has lost CA$3.3 billion in a horrible fiscal 2020 but Martin has been making all the right noises and has been cutting costs wherever possible. A major challenge for Aurora is going to be increasing sales from outside of Canada or from international markets.
Right now, quarterly sales from outside Canada are in the range of $4 million to $5 million. It estimates that its fiscal fourth-quarter revenues will range between C$70 million to C$72 million. The thing to remember about Aurora Cannabis is that it often misses its estimates.
My advice would be to avoid this stock until there is clarity on the execution capabilities of Martin and the team. Otherwise, you could watch your investment go up in smoke.
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