Why Aurora's Latest Strategy Smells Like Desperation

There's a big difference between hiring an activist investor and catching one's interest.

Cory Renauer
Cory Renauer
Mar 13, 2019 at 8:51PM
Health Care

Aurora Cannabis (NYSE:ACB) recently made a silly attempt to convince investors they could look forward to adults making smart decisions in the boardroom, and it worked. Shares of Aurora finished Wednesday's session 13.9% higher because the company hired an activist investor to set up some meetings with large consumer-goods companies eager to make a deal. 

If you don't understand why this investor relations stunt isn't worth a press release, you need to read this now. 

What activist investors do

Activist investors generally run large funds that take large stakes in a company's stock in an attempt to wield influence over it. This is often a CEO's worst nightmare, but for everyday investors like us, it can be a dream come true.

A man in a suit takes a boxing glove to the face.

How CEOs normally feel when an activist investor takes interest in their company. Image source: Getty Images.

For example, Jana Partners is an activist hedge fund that took up an 8% stake in Whole Foods in early 2017. That was enough to get the ball rolling and gather together shareholders who wanted the struggling grocer to put itself up for sale. Within a few months, Amazon.com swooped in with $13.7 billion in cash, which immediately raised Whole Foods' stock price 28% higher.

Whole Foods CEO John Mackey called Jana Partners "greedy bastards," but the struggling grocer's investors are probably better off.

Check out the latest earnings call transcripts for the companies we cover.

Who hires an activist to act as an advisor? 

Generally, activists try to help shareholders by getting management to do something it doesn't want to do in the first place. Hiring one as an advisor is pointless.

That didn't stop enthusiastic investors from piling in after Aurora Cannabis told investors that Nelson Peltz, a well-known activist investor with a great deal of food distribution experience, is officially a part of Aurora's management team as a "senior strategic advisor." Although Peltz is the CEO of Trian Fund Management, his fund hasn't disclosed any investment stake in Aurora Cannabis.

If Trian Fund doesn't own a piece of the company, Aurora's managers don't have to take the advice they're paying Peltz to provide. Despite slim odds that this partnership will produce more than a press release, Aurora Cannabis' market cap rose by roughly $1 billion on the day of the announcement.

closeup of marijuana flower in a giant growing operation.

Image source: Getty Images.

Now you want advice?

Peltz and Aurora will work on finding partnerships and expanding the company's global footprint, but those boats sailed a long time ago. Between August 2016 and December 2018, Aurora Cannabis undertook 15 acquisitions and made investments into 12 others. Now that the company has already expanded operations to 24 separate countries at great expense, any more expanding before we have proof these markets are viable seems like a bad idea.  

If Peltz were given a board seat, he would most likely put an end to the dilutive acquisitions that have already made it impossible for long-term Aurora shareholders to realize a decent return. This company has been using its own shares to expand at all costs, which is a lot more expensive than most investors realize.

Aurora Cannabis stock has risen an exciting 396% over the past two years, but most investors have overlooked the number of new shares the company's created to keep everyone interested. Over the same time frame, the number of outstanding shares nearly tripled. To provide the return investors were hoping for, profits needed to rise three times higher than investors were expecting.

Strategy lessons from this guy?

Peltz is a well known activist investor, but not because he's been particularly successful lately. In 2015, his fund poured $2.5 billion into General Electric (NYSE:GE), and shares of the conglomerate have underperformed the S&P 500 by 86% since Trian Fund Management disclosed its stake.

Shortly after pulling the trigger on GE, the Trian Fund opened a position in Procter & Gamble (NYSE:PG) that's become its largest at $3.5 billion. A decade ago, P&G had a handful of competitors that could even dream of launching a new brand of men's razor. Now, the big consumer-goods companies are all scrambling to buy start-ups that are competing in ways that just weren't possible a very short time ago.  

Experienced cannabis consumers in Canada already know that Aurora's brands can't compete with their favorite mom-and-pop operations in terms of quality. Try to imagine a can of Budweiser versus a fresh pint of ale at the brewery it was born in. The big difference is that small-batch marijuana tends to be significantly less expensive.

Peltz is having a rough time with P&G's established brands, but that's nothing compared to the challenges ahead of Aurora. The company's attempt to build brands in heavily taxed markets, with competition from untaxed illicit markets breathing down its neck, is going to be an uphill slog.

Vape cartridge on a table.

Image source: Getty Images.

What Peltz could bring to the table

Nearly every week, at least one marijuana stock rises after the company announces an all-stock purchase decision that would send stocks from any other industry tumbling. The marijuana industry isn't going to stop partying like it's the internet in 1999, and Peltz isn't going to stop Aurora from using its shares the way my son uses Monopoly money.

Aurora's stunt smells like desperation, but paying Peltz to be an advisor does bring an air of partnership possibility to Aurora's image that someone might find appealing. Hoping another desperate company with failing brands makes a bad decision, though, isn't a very good investing strategy.