Avoid Aurora Stock, Buy Canopy Growth Stock for Cannabis Exposure
At some point, Aurora Cannabis (NYSE:ACB) has to be a buy. Right? Perhaps eventually, it will be. But until Aurora stock shows signs that its downtrend is ending, why stick with a loser?
Source: ElRoi / Shutterstock.com
I couldn’t have been more clear about how I feel about cannabis stocks at this point. While many of these companies have explosive opportunities over the next 12 to 48 months, many others lack the financial strength to survive over that time frame.
As a result, investors need to blend the technicals and fundamentals — hand-picking which ones are most likely to survive, then thrive. In the summer when support gave way, I waved a flag of caution. After the washout and subsequent bounce in November, I said to avoid Aurora stock as it struggled to rebound.
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I don’t write that to showboat — trust me, I’ve had more than enough servings of humble pie. Instead, I write it to drive home the same point: If you’re going to speculate with cannabis stocks, don’t do it with the losers.
Avoid Aurora Stock
Source: Chart courtesy of StockCharts.com
The first problem with ACB stock? The chart.
Aurora stock continues to make new low after new low. In mid-November, the stock plunged to new lows. ACB stock bottomed at $2.14 and within days, shares were up about 50% — hitting a high of $3.25.
However, the 20-day moving average remained stiff resistance, and Aurora stock was unable to reclaim prior range support near $3.50. That right there was the first sign that ACB stock was to be avoided.
The next sign came when it failed to hold the $2.40 area, which quickly sent Aurora stock back down to new lows. Those lows now continue to break, leading to lower prices. I don’t know when ACB stock will bottom, but until it puts in a low and reverses trend, I’m not interested in buying it.
Then, there are the financials.
Despite explosive revenue growth and — quite frankly — solid gross margins, Aurora Cannabis is losing tons of money. Trailing revenue of 293.5 million CAD has produced a gross profit of 205.5 million CAD. Solid right? It is, but a trailing net loss of 383.5 million CAD is a red flag.
Total cash went from about 316 million CAD at the end of June to 191.9 million CAD at the end of September. Current liabilities weigh in at about 464.6 million CAD, while current assets of 588.3 million CAD.
Will ACB face a liquidity issue? I’m not sure. I just know that it lacks the same financial firepower as some of its peers, while the charts remain detrimental to the bull case.
If Not Aurora Stock, Then Who?
I like several other names more than ACB stock, including Canopy Growth (NYSE:CGC) and Aphria (NYSE:APHA). Canopy’s thesis and chart can be viewed here, while Aphria’s is available here.
While neither stock is robust at the moment, they are making much better strides that Aurora stock.
First, both have broken over downtrend resistance. In Canopy’s case, the stock is maintaining over the 20-day and 50-day moving averages as well. For Aphria, the stock is just over these key moving averages, and remaining above them would be a victory for the bulls. Second, these stocks are not only avoiding new lows, they are holding key support marks.
If that changes, it’s an opportunity for speculators to consider stopping out and limiting the damage. With Aurora stock, we don’t have key support holding up — so we don’t have a way to measure risk.
Now, look at the balance sheet difference (all figures in CAD).
Current Assets Current Liabilities Ratio (Current) Total Assets Total Liabilities CGC 3.6B 425.8M 8.4 8.2B 2.6B APHA 780.8M 138.5M 6.0 2.4B 708.4M ACB 588.3M 464.6M 1.3 5.6B 1.1B
Are these companies perfect? Not by any means. Canopy has a strong balance sheet, but negative free cash flow. Aphria has a smaller balance and is not yet generating positive free cash flow, but has turned a profit in seven of the last nine quarters.
These are not slam dunks, but APHA and CGC have better setups than Aurora stock. That said, they are still speculative stocks.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long APHA.
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