The Canadian cannabis sector has never marketed itself as a stable, worry-free opportunity. However, some names are worse than others — as is the case with Aurora Cannabis (NYSE:ACB). Once a bright spot in legal marijuana due to its massive international footprint, ACB stock plummeted in 2019 as fiscal concerns weighed more heavily than the company’s potential opportunities. With shares off to a rocky start to 2020, is there any hope here?
Investors have every right to be concerned. Since the last session of 2019, ACB stock appeared determined to kill every holding hands’ patience. At one point, the markets feared that shares could fall below $1. However, some positive notes — or at least, non-overtly negative notes — brought some life back into the embattled shares.
In a note to clients, Cowen analyst Vivien Azer described attending an investors conference, where Aurora Cannabis’ management team disclosed that it was working with creditors to restructure its debt. Also, Cantor Fitzgerald analyst Pablo Zuanic called for the company to find a better CEO.
Clearly, ACB stock can use any help that it can get, and these suggestions are steps in the right direction. But, will it be enough to convince observers to speculate on the company?
If you’re even mildly risk averse, ACB stock is not for you. Although I see optimistic catalysts for the organization and the industry, time is the biggest enemy; And don’t mistake the present situation: although management is trying to restructure its debt, what they’re really asking for is more digits on the clock.
If they get it, ACB stock could fly higher in 2020. However, as with anything cannabis related, that’s a big “if.”
The Possible Case for a Recovery in ACB Stock
Before we get into it, let’s reiterate once again: Aurora Cannabis is only for speculators at this point. While it has a chance for recovery, many things have to go right — and in time.
With that out of the way, the catalyst for ACB stock is the possible improvement of the Canadian cannabis market’s supply-chain issues and licensing backlogs. Specifically, Canada needs to approve more cannabis retail outlets and dispensaries to effectively feed demand. Failing that, it needs to feed demand based on efficiency metrics.
Interestingly, Azer pointed out that Aurora’s disappointing fiscal first-quarter revenue was at least partially attributable to “congested channel inventory…from initial inventory loading in anticipation of Ontario opening additional locations that has yet to occur.”
Importantly, this channel-inventory congestion isn’t a lame excuse. In the third calendar quarter of 2019, Ontario had over two million adult cannabis users. However, it only had 75 stores open to serve this demand. Put differently, there are nearly 27,000 users per each store.
Click to Enlarge
Source: Chart by Josh Enomoto
Unfortunately, this metric just won’t do. Currently, Canada has nearly 5.2 million cannabis users total and only 363 stores nationwide. Doing the simple math, this breaks down to 14,318 stores per one cannabis user.
Now, this last figure pales in comparison to the state of Colorado: it has approximately one store per every 10,000 residents! Be that as it may, the issue with the Canadian province of Ontario is that compared to other provinces, it’s incredibly inefficient. Of course, what’s really glaring is that Ontario is home to Canada’s largest population of cannabis users.
However, it’s not just Ontario. Provinces like Quebec, Nova Scotia and Manitoba have relatively sizable cannabis user communities — yet these markets too are grossly inefficient.
Nonetheless, any improvement here could do wonders for ACB stock.
Can the U.S. Improve Aurora’s Chances?
Another factor that could play a vital role for Aurora Cannabis is the legalization momentum in the U.S. Although marijuana remains a Schedule I drug, the federal government legalized hemp and hemp derivatives like cannabidiol, or CBD. This suggests that full legalization is becoming more of a reality than a pipe dream.
Furthermore, the upcoming 2020 presidential election presents an interesting wrinkle for ACB stock. Primarily, the Democratic party has generally moved toward supporting both marijuana legalization and decriminalization initiatives. Senator Bernie Sanders has gone a step further, indicating that he’ll legalize marijuana via executive action if necessary — and at 4:20pm ET, no less.
However, not everyone is quite onboard with such a proposal. For instance, former Vice President Joe Biden has flip-flopped on the legalization question. And if he wins the election, he probably wouldn’t be the most supportive of that idea. Plus, President Donald Trump could win another term — and as such, full legalization would clash with his law-and-order image.
Still, a few powerful catalysts are poised to launch ACB stock, that much is for sure. The question is whether they can actually do so, and in quick enough time.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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