2 Pot Stocks That Are Better Buys Than Aurora Cannabis – Motley Fool

2 Pot Stocks That Are Better Buys Than Aurora Cannabis - Motley Fool
Wait for the Post-Earnings Dust to Settle Before Buying ACB Stock
Aurora Cannabis (NYSE:ACB) may be one of the largest marijuana stocks you can invest in, but that doesnt mean its one of the best. While the company has been continuing to grow its revenues at an impressive pace, rising expenses have prevented the company from getting to breakeven. In its most recent fiscal year, Auroras net losses totaled $298 million Canadian dollars. The biggest knock on Aurora isnt how it has done in the past, however, but how challenging the next year may be.

The company doesnt have a big advantage over its rivals, and at a market cap of close to $4.5 billion, its also one of the most expensive pot stocks that investors can buy today. And when you consider that the company may be disadvantaged without a big company from another industry to help with its growth and cash flow issues, Aurora could be in big trouble if its share price continues to fall, as that will only make it more difficult to raise money. Thats not something investors want to worry about, as nothing can cripple a companys stock the way a cash shortage can.

Aphria (NYSE:APHA) has also been seeing significant sales growth, but unlike Aurora it hasnt been piling on the losses. Its numbers have been a lot better, with Aphria generating a net income of CA$15.8 million last quarter. Aphria also posted a profit in three of the past four quarters overall, a rarity for pot stocks. One of the reasons Aphria may be a more cost-efficient operation is that it simply doesnt have as many locations over the world. While both companies have a presence on five continents, Aphria is in just 10 countries compared to a whopping 25 for Aurora.

CCO Cam Battley said that the miss stemmed from its non-core cannabis revenues, including analytical testing and patient counselling. Aurora was forced to push back its projection for positive EBITDA to fiscal 2020, an adjustment which shook its market value. Aurora management also added that the slow pace of the retail rollout had been a drag on its growth.

Growth investors may think thats an advantage for Aurora, but the reality is that markets outside of North America are going to take years to develop. In the short term it could just lead to a whole lot of cash burn, which is what Aurora has been faced with. Simplicity beats market penetration at this stage, and thats where Aphria might be better positioned for success and profitability next year.

The company released its fourth quarter and full-year results for fiscal 2019 on September 11. Net revenue jumped 52% from the prior quarter to $98.9 million and kilograms produced rose 86% to over 29,000 in the quarter. Still, Aurora missed its own guidance in the quarter which sparked a selloff for the second-largest producer listed on the TSX.

Green Thumb Industries (OTC:GTBIF) doesnt have a big global reach, but with operations in the U.S., it also doesnt need to. That simplifies the companys operations and prevents it from having to worry about managing operations and relationships that are oceans away. Instead it can focus on a very strong U.S. market that was worth $11.3 billion last year and thats expected to grow at a rate of 14.5% annually.

Shares of Aurora had an RSI of 29 at the time of this writing, putting the stock in technically oversold territory. The company is still on track for profitability in the first half of fiscal 2020 and it should receive a boost from the next wave of cannabis legalization. I’m buying the dip in late September.

The company has already accumulated more than $110 million in just the past four quarters, and although it hasnt had success in turning a profit, the companys financials are still in better shape than Auroras, with Green Thumb recording a net loss of less than $10 million in three of the past four quarters. The key to the companys growth thus far has been the success of its retail strategy, with its Rise and Essence brands of stores doing very well, as retail revenues grew 189% last quarter.

Aurora announced in June that it planned to expand into the edibles market. It has also entered into a partnership with the UFC in the United States to enhance research on using CBD for pain management and recovery. The company plans to have its new slate of products hit shelves by the middle of December.

With 95 retail locations across the country and more still to be opened, Green Thumb is able to take advantage of growth opportunities that Aurora doesnt have access to, and wont until marijuana is legalized federally. 

What’s the company’s strategy? It’s simply to roll-up the fragmented collision repair centre industry. After years of rapid growth, Boyd now controls 4% of the entire industry. Still, Boyd’s market cap is just $3.5 billion, while the industry at large is worth roughly $50 billion. That should provide plenty of additional growth, especially considering 80% of the industry consists of small business owners in local communities. Boyd stock has never had a losing year in its entire operating industry. I expect 2020 to be another banner year.

Aurora Cannabis is an expensive stock to own today, even with its share price continuing to fall in value. If youre looking for better value and a cannabis company with better odds of posting a profit, then Aphria could be a much safer buy. And if its growth that youre after, its hard to argue with Green Thumbs sales numbers and potential, especially with the company recently making an acquisition of Fiorello Pharmaceuticals, which will give it a strong presence in New York. 

If you were an investor in Aurora Cannabis (NYSE:ACB), you were probably looking forward to the Canadian cannabis giant’s Q4 earnings report. Aurora issued guidance in August that looked very promising and on Sept. 11, ACB stock closed at $6.49 in anticipation.

Pot stocks are in their longest-ever losing streak. Over the last 12 months, most cannabis ETFs are down roughly 50%. As with any bear market, the smallest competitors have gotten it the worst. Green Organic Dutchman Holdings (TSX:TGOD), for example, is down nearly 70%. The company’s market share has been reduced to just $630 million. While this stock carries its fair share of risk, there’s no denying that 2020 could be an explosive year for the company.

However, when Aurora actually announced its Q4 earnings that evening, the company missed its own revenue guidance from the month before and came in well below what analysts had been expecting.

Importantly, the company remains profitable, with revenues continuing to grow year after year. Management and analysts alike anticipate the company maintaining a long-term EPS growth rate between 20% and 30%. If this becomes reality, the current valuation is a steal. In five years, Canada Goose could realistically be earning $5 per share. At a discounted 25 times earnings valuation, that implies a share price of $125, representing 300% in upside.

Aurora stock dropped over 9% the next day. It’s been downhill since, a trend that continued when ACB closed at $4.62 on Friday, losing another 2.43% on the day.

Canada Goose Holdings (TSX:GOOS)(NYSE:GOOS) is another former growth stock in the penalty box. After its IPO in 2016, the stock went on a 400% rise in less than 24 months. This year, shares have slid by 30% due to fears of slowing growth. After years of trading at 50-100 times earnings, the stock is now valued at just 34 times forward earnings.

Aurora stock is in territory it hasn’t seen for a year. You have to go back to August 2018, before recreational marijuana use was legalized in Canada, to find ACB trading lower. It hit $4.60 that month.

At this point, ACB stock is underwater for 2019, down nearly 7%. Is it a buying opportunity? After all, it did hit $11.68 less than a year ago. Or is the current slump likely to continue?

In early September, Aurora Cannabis terminated its sourcing agreement with Green Organic, while liquidating the rest of its equity stake. Aurora had originally agreed to purchase 20% of Green Organic’s cannabis output. Without a cornerstone customer and investor, TGOD shares have been left for dead.

There were some positives in the Q4 report, including a big 52% increase in net revenue compared to the previous quarter. However, ACB released guidance in August where it told investors it was expecting net revenue of between CAD $100 million and CAD $107 million.

Boyd Group Income Fund (TSX:BYD.UN) is a simple pitch: the company will continue executing the same strategy that’s made countless shareholders filthy rich. Since 2006, shares have increased in value by 14,000%. A $10,000 investment would now be worth $1.4 million.

Analysts were even more optimistic, looking for revenue in the $108.3 range. When Aurora announced net revenue of CAD $98.9 million, missing not only analyst expectations but even the low end of its own guidance from just a month before — the results were predictable.

It’s not difficult to find yesterday’s high-growth stocks. The problem arises when trying to find tomorrow’s high-growth stocks. Even worse, high-growth expectations are already baked into the price, meaning your upside will be limited.

ACB stock was hammered, losing over 9% of its value. Since then, it’s been suffering a post-earnings hangover, continuing to take loses.

ACB stock has performed poorly as in investment so far in 2019. It closed 2018 at $4.96, which means it has lost 6.9% of its value year-to-date. In fact, after peaking at just under $10 in March, the trend since then has been pretty much all downhill.

It’s down a whopping 54% since those March highs. The brief spike in the weeks after the company released that promising Q4 guidance was one of the few bright sides for Aurora stock since the spring.

Canopy Growth (NYSE:CGC) is the biggest of the bunch, and it’s down 11% so far in 2019. Cronos Group (NASDAQ:CRON) is down 12%. Tilray (NASDAQ:TLRY) has shed 63% of its value this year. Beleaguered CannTrust Holdings (NYSE:CTST) is down 75% in 2019.

Hexo (NYSE:HEXO) is one of the few cannabis stocks that is defying the downhill trend for 2019, with 22% growth. But even HEXO has been feeling the effects of a recreational cannabis market that stubbornly refuses to take off, and is currently trading for about half of what it did in April.

In other words, cannabis stocks, in general, are proving to be best suited to long term investors. Most of the companies — including Aurora — saw their stock price rise dramatically when Canada announced it was legalizing recreational pot use starting last October.

Most of them also have seen their market cap rapidly deflate as reality has set in. There have been production ramp-up and distribution challenges, consumer demand was much more tepid than expected, and most of these companies have taken on debt to expand their production capacity. 

The future looks bright for Aurora Cannabis, but expectations have been tempered by the reality of the recreational cannabis market. It’s going to take time to grow.

The Wall Street Journal’s analysts are largely split between buying and holding ACB stock and their average 12-month price target of $7.65 reflects some optimism that Aurora is due for a recovery. That’s a significant upside from the current price, but few analysts see a return to the heady days of $10 any time soon.

The question of whether to buy now or waiting to see if Aurora Cannabis stock falls further is one of risk tolerance. Buy now, and the odds are good you’ll see a decent return on your investment over the next 12 months.


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