Aurora Cannabis' (ACB -1.12%) stock is down more than 75% in just the past six months. While all pot stocks have been performing poorly, Aurora has still been one of the worst stocks to own during this stretch. Rival Canopy Growth (CGC 12.26%) declined 52% over the same period, which is close to how the Horizons Marijuana Life Sciences ETF performed. It's a troubling time for investors as things continue to go from bad to worse for the cannabis industry.
However, Aurora investors can make one mistake today that could put their portfolios in even more harm's way.
Don't assume the stock has reached bottom
Currently at a $2.1 billion market cap, Aurora still has a relatively high valuation. The reason it still looks expensive is that Aurora remains dependent on the Canadian market, which, according to research company BDS Analytics, might only be worth $5.2 billion in 2024. While Aurora has operations in other parts of the world, those markets will be even smaller pieces of the pie, and they are still in their very early stages. Only two countries have legalized recreational pot thus far: Canada and Uruguay. While there may be greater long-term potential outside of Canada, for now, it remains one of the best legal markets for cannabis today.
There's also no shortage of competition in the Canadian cannabis market, with Canopy Growth, HEXO, and Aphria among the bigger names in the industry right now. More companies could exist by 2024, making it even more difficult for Aurora to dominate the market. And that's what it would have to do in order to justify being worth about 40% of the market four years from now.
That's why the possibility that Aurora will continue falling in value is a very real one. Although the stock lost more than half of its value in 2019, that doesn't mean that it's become a good buy or that it's only a matter of time before things turn around. That kind of thinking could lead to investors incurring even greater losses as the stock continues to sink in value.
Why further decline could be around the corner
Investors should not forget Aurora missed its own sales estimates in Q4 2019. A big earnings miss can always send a stock down even lower, and there's little reason to believe that Aurora will turn things around anytime soon. The company burned through 218 million Canadian dollars from its operations over the past 12 months, so it could have a pressing need to issue more shares to keep the lights on. As of Sept. 30, Aurora had just CA$153 million in cash and cash equivalents.
If Aurora issues more shares, its stock price will plummet even further. The danger is that the more it stock falls, the more shares will need to be issued to raise the same level of cash it would have needed prior to the decline. That can put the stock into a dangerous spiral.
What should investors do?
Investors should consider selling their shares to salvage what they have today. It's not an easy decision since it locks in your losses, but if conditions improve and Aurora starts producing better, more consistent results, you can always buy back in at a later point. There's no guarantee that the stock will turn around from where it is today, and that's why it's important to consider the risks of holding on to shares of Aurora.
While the temptation might be to buy more shares of the company to average down your costs, it's a dangerous move that could leave you even more exposed to a crashing stock price. In a situation like this, investors are better off taking the advice of billionaire investor Warren Buffett: "The most important thing to do if you find yourself in a hole is to stop digging."