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Aurora Cannabis Stock and the Pot Market’s Credibility Problem

Dana Blankenhorn

Aurora Cannabis (NYSE:ACB) missed earnings estimates by a mile, but you wouldn’t know it from the company’s press release or statements from some boosters.

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Sales of $74.2 million were about $7 million below estimates that had previously been revised down, and there was an unexpected loss of $8.9 million from two of its investments. The net loss to common stockholders, however, was reported as just 2 cents per share.

The company’s press release was filled with happy talk. CEO Terry Booth said ACB had taken its place “as the global leader in cannabis production, research, innovation, and international market development.” He later called himself “a little red-faced” about the miss.

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But one analyst was so fooled he proceeded to pound the table for a stock that is now 15% below its pre-earnings level, insisting sales had “soared 349%.”

The Credibility Gap

All this highlights a growing credibility gap between pot advocates and economic reality, the kind of thing that often comes before a market’s hard fall.

Pot advocates have insisted that legal marijuana is a gold mine with enormous pent-up demand. The reality is it’s a minefield with a lot of un-exploded ordnance.

While Canada legalized marijuana use a year ago, it’s still subject to provincial regulation. Many provinces have been slow-walking their approvals due to concern with health impacts. Legislators in New York refused to go along with a call for legalization. Even Illinois, the 11th state to legalize the drug, is having trouble getting its market set up.

At the same time, vaping, a popular method for taking marijuana because it involves taking less smoke into the lungs, is under renewed attack. Aurora chairman Michael Singer said he is “very worried” about the U.S. vaping situation. He insists Aurora will test all its vaping products under rigorous Canadian standards, but a ban on e-cigarettes would be certain to have deep impacts on the marijuana market.

The CBD Oil Boom

One big protection against the iffy situation with marijuana is CBD oil. People in chronic pain are anxious to try this marijuana derivative as opioids have become demonized. Aurora has been pursuing the opportunity in the states, using the advice of strategic advisor Nelson Peltz and signing an endorsement deal with the Ultimate Fighting Championship (UFC).

But just as the pot market is in a “trough of disillusionment,” as I called it before earnings, CBD oil is about to enter one just as Aurora ramps up investment.

While there is anecdotal evidence the substance helps with pain, scientists have found no evidence it works on anything but some forms of epilepsy. Pain relief is also one of the least-supported benefits in clinical trials.

The result of this lack of information is that desperate people want CBD oil to cure cancer or heal their pets. This could give CBD oil the reputation of being not a cure-all, but snake oil.

The Bottom Line on ACB Stock

The boom in Aurora Cannabis stock took off before the science or market could justify it.

Legal products must go through stringent regulation and tested for safety before they enter a market. Illegal ones do not. Marijuana and its derivatives exist in a gray area between legal and illegal, where all sorts of claims are made but few have been vetted.

The two states that legalized weed first, Colorado and Washington, knew they were just making an illegal high legal, and acted accordingly. The new market is out way ahead of its skis. Whether Aurora has enough cash to reach its promised land should now be an open question.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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