Aurora’s downhill battle

Since March 19th when the cannabis sector reached a peak (Based on the Horizons Medical Marijuana life sciences ETF) for 2019, Aurora Cannabis has been in a steady downtrend. Many long term shareholders are becoming impatient and frustrated with the company, complaining that their capital gains have diminished since March as the stock continues to downtrend. In my opinion, Aurora Cannabis is performing like most large caps in the sector and is downtrending not because of poor company performance or dilution but for the simple fact that the entire sector has seen a very harsh spring and summer. Now we can have this debate all day long about company-specific performance versus the index but we need to face a simple fact that the entire sector has carried a highly speculative nature and valuations have seen extreme highs and lows. This is because it’s very hard to put an accurate valuation on a partnership, key hire, acquisition or similar news that is positive for many of these companies.

Since March 19th Aurora Cannabis has announced a lot of positive news but despite everything, the stock could not escape the selloff. Many of us investors are wondering what is next for the sector, how low are we going and what could drive a turnaround in share prices, especially for Aurora Cannabis?

Will M&A Activity heat up the market?

Last week we saw two strategic investments within the cannabis sector starting with Aliment Couche-tard buying up 20% of fire and flower. Then we saw Auxly receive 123 million dollars from big tobacco giant imperial brands. Some say that when M&A activity starts to heat up, it is signaling that the market is coming close to a bottom, making valuations attractive enough for big companies to invest millions of dollars into the sector. We saw the start of a massive bull market back in 2018 when constellation brands invested 4 billion dollars in canopy growth that fuelled speculation across the entire sector. Will this be the catalyst this time as well? So far the sector remains unfazed by the recent news and continues to selloff despite the positive sentiment on wall street, lower interest rates, and markets hovering around all-time highs.

What will it take for a turnaround to happen?

Many investors get caught up in the volatility and assume that since a stock hit a certain point in the past that it will inevitably hit that point again in the future, which is sometimes a bad way to look at things. I don’t discourage an optimistic view on the sector, in fact I remain extremely bullish and believe that many of these companies will be sitting many times higher than their current prices, but as investors we need to do our research and due diligence and figure out what is going to drive short term AND long term growth. Every market goes through its ups and downs, and we are currently in a tiring decline but what is going to be the catalyst for the next bull run? In my opinion, I think that at this point in the cannabis sector it’s going to take earnings growth and positive EBITDA to fuel the next rally. Aurora Cannabis expects to be on track to record positive EBITDA by the end of last quarter, but until then more declines could be in store for the sector. Instill patience, a conservative diversified investment strategy and hold on for the ride, the rollercoaster ride has only begun.

(Disclosure: We are long Aurora Cannabis)

ACB shares were trading at $6.28 per share on Tuesday afternoon, up $0.07 (+1.13%). Year-to-date, ACB has gained 26.61%, versus a 21.38% rise in the benchmark S&P 500 index during the same period.

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About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...

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