It's that time again, folks -- and, no, I'm not talking about air-conditioner weather.
Last week (on May 15), the deadline was hit for money managers with more than $100 million in asset under management to file Form 13F with the Securities and Exchange Commission. Form 13F lists all the holdings of prominent investment funds and hedge funds as of March 31, which essentially allows Wall Street and investors a look under the hood, so to speak, to see what the top money managers have been up to during the first quarter of 2019. This inside peek can alert investors to trends within a sector or industry and can help determine overall market sentiment.
Understandably, there are limitations to 13F filings, such as them being 45 days old by the time investors do get to look under the hood. This means the holdings listed as of March 31 for a particular investment or hedge fund may have changed substantially over the past six-plus weeks. Nonetheless, 13F filings can be an invaluable investor tool.
Surprise! Billionaires are buying Aurora Cannabis
Although much of the focus following the release of 13Fs was on big-name money managers buying into the FAANG stocks -- Facebook, Amazon, Apple, Netflix, and Alphabet, which was previously known as "Google," thus the "G" -- in the first quarter, there was another interesting storyline. Namely, that the most popular marijuana stock among investors, Aurora Cannabis (NYSE:ACB), found its way onto Wall Street's buy list.
According to WhaleWisdom, which is a compendium of 13F filing information, the aggregate number of Aurora Cannabis shares held by all 13Fs filed was 88.66 million, as of March 31, an increase of 1.15% from Dec. 31, 2018. All told, 129 funds created a new position, with 128 funds adding to an existing position, while a mere 29 funds completely sold out of Aurora and 39 reduced their stake.
But the big story here is who was doing the buying.
To begin with, billionaire Ken Griffin, the founder and chief executive of Citadel Advisors who currently has a net worth of nearly $12 billion, purchased just over 1.2 million shares of Aurora Cannabis stock in the first quarter, worth about $11.2 million. This isn't a particularly large position for Citadel, which had $201.1 billion in assets under management as of March 31, but it's a substantial jump from the 31,177 shares Citadel owned of Aurora as of the previous quarter.
Another billionaire gobbling up Aurora's stock in the first quarter was James Simons, the founder of quantitative investing hedge fund Renaissance Technologies. Simons' fund, which had $110 billion in assets under management at the end of the first quarter, opened a position in Aurora by purchasing 788,595 shares, worth $7.1 million.
Here's what billionaire money managers likely see in Aurora
What, exactly, coerced some of the smartest investment minds to dig into Aurora Cannabis in the first quarter?
One possible reason is Aurora's leading production potential. The company currently has 14 cultivation sites, including its most recent acquisitions, with the company forecasting at least 625,000 kilos of annual run-rate output by mid-2020. Of course, if you add up Aurora's conservative projections, its output is more like 660,000-plus kilos by the midpoint of next year. As the leading producer in Canada, Aurora should have no trouble securing provincial and international supply deals, as well as benefiting from economies of scale. As the company scales its operations, its growing costs on a per-gram basis should fall considerably.
Another potential impetus for billionaire money managers is Aurora Cannabis' overseas presence. Inclusive of Canada, the company had a production and/or distribution presence in 24 countries as of the end of its most recent quarter. That leaves its competition eating its dust. These external sales channels will prove especially important if and when Canadian dried cannabis flower becomes oversupplied and commoditized, as we've seen happen in select U.S. states that have legalized recreational weed. These external sales channels will ensure that Aurora's margins aren't decimated by declining per-gram flower prices in Canada.
It's also likely that these prudent money managers are in favor of Aurora's decision to focus on the medical marijuana market. Even though recreational cannabis is still on Aurora's radar, and it offers the largest pool of consumers (relative to the medical side of the equation), medical pot patients use cannabis more frequently, buy product more often, and are far more willing than adult-use consumers to purchase cannabis derivatives, such as oils. Derivatives are the key, since they generate much juicier margins than traditional dried flower.
Lastly, there's the expectation that Aurora Cannabis will finally land a brand-name partner at some point in 2019. The company hired billionaire activist Nelson Peltz, the founder of Trian Fund Management, as a strategic advisor in mid-March. Peltz's expertise is in the food and beverage industries, which is perfect for Aurora since it would love to infiltrate the edibles and infused beverage industries.
Two notes of caution
Then again, even billionaire money managers can be wrong from time to time. Positives aside, Aurora Cannabis also offers two pretty substantial red flags.
The first is the company's consistently growing outstanding share count, which surpassed 1.01 billion in the fiscal third quarter (ended March 31). Since August 2016, Aurora has made 15 acquisitions, nearly all of which have been paid for by issuing Aurora's common stock. As a result, the company's outstanding share count has risen by about 1 billion shares in less than five years. This has been particularly problematic since the beginning of 2018, with Aurora's share price going nowhere, all while its market cap has more than tripled. As long as Aurora continues to fuel capital raising activity with share issuances, investors run the risk of being left behind as the result of dilution.
A second note of caution is that, despite its leading production potential, the costs associated with constructing its numerous grow farms, as well as laying down the infrastructure to support its overseas ventures, are significant. Whereas a reasonable profit was expected in fiscal 2020 a few months ago, Wall Street's consensus now calls for breakeven results in full-year 2020. With the company losing money hand over fist on an operating basis, it could be difficult to support a nearly $9 billion market cap.
Regardless of whether the bulls or bears are right in the near or long term, the key point is that marijuana has arrived on Wall Street.