Shares of Aurora Cannabis (NYSE:ACB) have been soaring lately, up 25% in just a few trading sessions. Because of this giant move, investors are wondering if now’s the time to get in on ACB stock or if a 25% rally means they missed their chance.
What’s the verdict?
I wouldn’t say there’s no upside left, but the risk-reward profile has certainly muddied. Unfortunately, investors who are suffering a case of FOMO — a “fear of missing out” — have no reason to be. There was ample time to buy this name, even after the big rally.
Let’s look at the charts to see why.
Trading ACB Stock
Click to Enlarge
There are so many choices in the investing world that I do not like to be a “told you so” person. Meaning that even studious followers of the stock market can’t act on everything they see and read. In the case of ACB stock, though, perhaps investors can extract a lesson.
Notice how the stock gapped higher by about $1 per share last week, closing near $9 after previously closing near $8. Many would argue that this ~12.5% gain was simply too much of a rally and they’d have to move on to something else. I needed to see how ACB stock would trade over the next few days, too, as I don’t want to chase a double-digit move.
The next day ACB stock put in an “inside day.” That’s where a stock’s daily range trades within the range of the prior day. Notice on the chart above how the second candle following the big gap-up candle is within its range? After a big rally like this, that’s a great consolidation pattern that bulls want to see. It shows that longs aren’t winning to sell and shorts don’t have enough “oomph” to drive it down.
The next day, ACB stock began what looked like another inside day, before rocketing higher. In other words, this price action allowed investors to hop on before an 11% move higher.
So what now?
Shares of Aurora Cannabis stock are stretching into overbought territory. However, that does not mean it cannot continue higher. I wouldn’t mind seeing how ACB stock does over the next few sessions and if we get a slight pullback before moving higher again.
Keep in mind, ACB stock has breached $12 more than once in the past 12 months. Perhaps it’s on its way of doing it a third time.
Valuing Aurora Cannabis Stock
So what got Aurora Cannabis stock rallying so strongly anyway? The company brought activist investor Nelson Peltz on board to advise on partnerships and global expansion.
They didn’t pick a bad advisor, either. Peltz has a long list of contacts and the hedge fund manager is a master in the consumer packaged goods space. Whether this leads to a partnership with a well-known blue-chip company or not remains to be seen. But adding him in this role certainly doesn’t hurt Aurora’s chances.
That said, we’re still very much in the “land grab” phase of the cannabis market. While growth is impressive — as ACB stock grew sales 339% year-over-year last quarter — the valuations do not support these names. For instance, while revenues more than quadrupled last quarter, sales came up just short of $39 million. With a $10 billion valuation, that growth better continue for some time in order for it to be justified.
But if there wasn’t an opportunity here, we wouldn’t have Constellation Brands (NYSE:STZ) taking a multi-billion stake in Canopy Growth (NYSE:CGC) or Altria (NYSE:MO) doing the same thing with Cronos Group (NASDAQ:CRON). There’s money to be made and an opportunity to be had with states and countries legalizing marijuana, both for medical and recreational use.
That said, it’s not a short-term or risk-free endeavor for investors.
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