Weekly Cannabis Stock News: Aurora Cannabis Trims its Pot Portfolio – The Motley Fool

Weekly Cannabis Stock News: Aurora Cannabis Trims its Pot Portfolio - The Motley Fool
Aurora Cannabis: Why Divesting The Green Organic Dutchman Position Is Good For Business
Its almost as if marijuana stocks are taking a late summer break. There werent many big developments in the sector this week, following a rather eventful few weeks when most marijuana majors reported earnings.

But this is a young, restless corner of the stock market, so theres almost always something happening. Heres a pair of items that weed investors noted and reacted to over the past few days. 

However, Aurora’s lack of cannabis-infused drinks is a big reason why I’m (pardon the pun) high on both Canopy Growth (NYSE:CGC) and Hexo (NYSE:HEXO), whose Big Alcohol partners bring knowledge and distribution capabilities to the table, making them attractive cannabis investments in my opinion. 

Aurora Cannabis (NYSE:ACB) has become one of the most important marijuana stocks through acquisitions. These numerous purchases include stakes in other publicly traded cannabis companies. One of these was fellow Canadian grower and distributor The Green Organic Dutchman Holdings (OTC:TGODF).

Aurora Cannabis (NYSE:ACB) announced September 4 that it sold its 10.5% stake in Green Organic Dutchman Holdings (OTCMKTS:TGODF) for gross proceeds of CAD $86.5 million or CAD $3 a share. Owners of Aurora Cannabis stock will be pleased to learn the sale resulted in a 50% internal rate of return. 

At least until recently. This week, Aurora announced that it has sold its considerable position in TGOD, booking a tidy profit on the sale. All told, it unloaded a bit over 28.8 million shares of the company for $3 Canadian apiece, for total consideration of CA$86.5 million. Thats around 50% higher than what Aurora paid for the stock when it first acquired it in early 2018.

In my opinion, the owners of Aurora Cannabis stock would be well served by the company reconsidering its stance on cannabis-infused drinks. I can say with certainty that my age group (mid-50s) are far more inclined to try THC/CBD drinks or edibles than they are vapes or dried flower. 

Aurora said that TGOD basically became surplus to requirements once Aurora had Whistler Medical Marijuana in its portfolio. Auroras purchase of that company closed in March.

At the time, the buyer said Whistler “provides Aurora with a premium and differentiated organic certified product suite, expanding both its medical and consumer offerings, and reinforcing Auroras presence in the well-established West Coast cannabis market.”

Given the recent health concerns about vaping that have cropped up in 16 U.S. states suggests that the failure to have a backup plan could hurt Aurora in the near term. Long term, I’m sure the vaping issues will get sorted, but there is definitely more investigation to be done. 

Like most peers in Big Cannabis, the acquisitive Aurora is always on the hunt for capital. Offloading a big stake in a thus-far unprofitable rival feels like a fast, effective, and relatively painless way to raise some dosh. Aurora shareholders would probably prefer the company to continue building our its own operations rather than amassing stakes in peers. The TGOD position was considerable — it gave Aurora around 10.5% of the company.

“Aurora Cannabis continues to use its industry-leading size in both Canada and abroad to capture a big part of the global cannabis market. The fact that it doesn’t have a U.S. business plan at the moment doesn’t mean it won’t enter the market in the future.”

This might not actually be the end of Auroras involvement in TGOD. The former still holds warrants giving it the right to buy 16.7 million shares of the latter.

Sure, it won’t be able to legally sell these drinks in its Canadian home market until mid-December of this year, but that’s left it with plenty of time to organize a game plan for the drinks market. It’s disappointing that it hasn’t.

On Tuesday, Cowen analyst Vivien Azer chopped her price target on Tilray (NASDAQ:TLRY) stock to $60 from the previous $150. For those counting at home, thats a 60% reduction. Its rare that analysts reduce their targets so drastically.

So after that, Tilray shareholders deserted the stock in droves, right? Well, actually, no, they didnt. In fact, following Cowens evisceration, the stock price rose, closing 17% higher on the day.

“Furthermore, while it doesn’t have a huge strategic partner, if it continues to implement innovative ideas such as cultivating outside, I don’t think it will have a problem attracting a huge strategic investor.” 

What gives? Although we cant crawl inside the mind of every investor, we can tease out a pair of potential reasons.

First, as with other marijuana stocks,1 Tilray has really taken it on the chin this year. Its been the victim of fears of oversupply in the key Canadian market. It also habitually posts net losses. A weak Q2 earnings report didnt help; since the start of this year, the shares have declined 54%.

“You’re going to start seeing people shift over from the illicit market, the minute vape pens become available. And we have a head start on that,” Aurora Chief Corporate Officer Cam Battley said in June. 

Second, the Cowen analyst didnt change her recommendation on Tilray — Azer still considers it to be a buy. And a buy with significant upside at that. The new $60 target is nearly double the stocks most recent closing price.

You can’t be all things to all people. That I get. So, it makes sense that Aurora’s focused its efforts on products that have done well in the U.S. states where recreational pot is legal. 

So in the end, Azer is still bullish on the stock, and she has justification for this. Tilray seems well positioned to take advantage of the so-called “second wave” of Canadian recreational cannabis legalization. This action will sanction the sale of cannabidiol-derived product such as edibles.

In the meantime, Aurora has more than $40 million in pre-tax profits to put to work. Here’s where I think the owners of ACB stock will get the most bang for their buck.

Also, a recently licensed cultivation and shipment facility in Portugal is already gearing up for shipments to European markets. This outlet gives Tilray fast and effective access to certain countries on the continent that either already have nascent marijuana markets or are likely to soon open them.

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