The meltdown in the share prices of Canada’s top marijuana stocks has investors wondering which cannabis stock might be the best pick right now for a contrarian investment.
Let’s take a look and the current situation in the market and see if Aurora Cannabis (TSX:ACB)(NYSE:ACB) deserves to be on your contrarian buy list.
Growing pains
The marijuana industry is still in its infant stages, and investors should expect the volatility the sector has witnessed in the past year to continue for some time.
The medical marijuana segment in Canada continues to mature, and Aurora Cannabis is a top-two player. This is the result of aggressive acquisitions made in 2018 when Aurora Cannabis spent $1.1 billion to buy CanniMed and then $2.5 billion to take over MedReleaf.
The deals moved Aurora Cannabis from the middle of the pack in the emerging marijuana sector to a leader in the Canadian market. The acquisitions also provided key production capacity at a time when scaling up was critical to winning supply agreements with the Canadian provinces ahead of the opening of the recreational market last October.
The rollout of the legal recreational marijuana market hasn’t gone as smoothly as many investors had hoped. Right from the outset, it became apparent that the launch might have been rushed. Supply problems, distribution issues, and a lack of brick-and-mortar retail locations have hindered sales.
Consumers continue to turn to black market due to the frustrations encountered with the legal market. Pricing also remains a point of contention.
Investors have lost patience with the steady string of large losses reported by producers in the quarterly reports. Scaling up requires significant investments, and it is reasonable to see negative cash flow for a while, especially when all the companies are trying to get a foothold in as many markets as possible right from the outset.
However, the sky-high valuations are based on the assumption that revenue is going to ramp up significantly, and that hasn’t occurred at the pace the companies originally forecasted to their shareholders.
As a result, a reality check has hit the market, with most stocks off more than 50% from the 2019 highs. Aurora Cannabis, for example, recently dipped below below $5, which is a level not seen since late 2017 and well off the $13 it topped in March this year.
Should you buy Aurora Cannabis today?
At the time of writing, Aurora Cannabis trades at $5 per share and has a market capitalization of $5.1 billion. That’s still expensive for a company that reported a net loss of $298 million for the year ended June 30, 2019. Revenue was about $250 million for the 12-month period and just under $100 million for the most recent quarter.
Bulls point to the global opportunities in both medical and recreational sales. Aurora Cannabis has operations and sales in 25 countries supplied by 15 production facilities. The company’s size and scale gives it an advantage as the market continues to consolidate.
When all the dust settles, Aurora Cannabis should be one of the remaining players vying for billions of dollars of revenue in the various cannabis segments.
Contrarian investors with a positive view of the opportunities in the industry might want to consider nibbling on additional weakness, but I would keep the exposure small and probably wait for evidence the sector has bottomed before starting a new position.
We could see another leg to the downside before the stock stabilizes and moves higher.
