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3 Reasons Aurora Cannabis Investors Should Be Optimistic for the Future

By David Jagielski - Feb 23, 2020 at 8:20AM

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The company's coming off a tough quarter, and here's why buying the dip may not be a terrible idea.

Aurora Cannabis (ACB -3.65%) is under a lot of heat these days as it comes off yet another disappointing quarter. The stock lost more than half of its value in 2019, dropping 56% during the year, which was much worse than cannabis stocks a whole did, as the Horizons Marijuana Life Sciences ETF declined by a more modest 37%. And unfortunately, Aurora isn't off to a good start in 2020 as news of CEO Terry Booth resigning and the company announcing 500 layoffs and "modest to no growth" for the upcoming quarter has many investors worried that things may get even worse. But as bad as things may look, there are three reasons the stock may not be a bad buy today.

1. Low expectations may work to its advantage

The stock market is all about beating expectations, and whether Aurora is profitable or not, or doubling its sales, is irrelevant. Analysts evaluate stocks against projections, and with Aurora announcing a flurry of bad news, it's effectively lowering expectations for upcoming quarters. While there's no guarantee Aurora will beat or even meet those expectations, it certainly puts the company in a much better position to be able to do so.

Sales of edibles and the launch of more pot shops in Canada should make for a stronger year for Aurora in 2020. Those two factors alone will help the company reach more customers, and that's why it's possible the company may be sandbagging expectations in an effort to make 2020 a much stronger year for the stock. There's nothing like a solid earnings beat to send a stock soaring, especially in the highly volatile cannabis industry.

A cannabis plant

Image source: Getty Images.

2. The stock may finally be cheap enough that the potential rewards outweigh the risks

When Aurora released its results on Feb. 13, it was trading near its 52-week low, and although it's rallied since then, it's still down three-quarters from where it was this time last year when it was trading around $7. While it may not get back to that price point -- and certainly not anytime soon -- it doesn't have to for investors to earn a good return given where the stock is today.

Trading at $1.68 as of the close on Feb. 20, Aurora's stock is trading at around nine times its sales, which is a competitive price in the industry. Its rival, Canopy Growth (CGC -18.57%), trades at a multiple of more than 26, and investors are even paying 15 times revenue for U.S.-based Curaleaf (CURLF -0.39%). By comparison, Aurora starts to look a lot more attractive.

While there's no guarantee that Aurora won't continue to fall further, its lower price has made the stock less risky given its more reasonable valuation and its price relative to its peers. By slashing jobs, the company reduces that risk even further as it looks committed to ensuring it saves cash, which is critical for its growth at a time when its share price is as low as it is and when raising money is going to be more difficult.

3. A change in leadership could help turn things around

Many companies in the industry have undergone leadership changes lately, and Aurora needs to look no further than Canopy Growth as to how a new CEO can help win over investors by saying and doing the right things.

In a recent interview, Aurora's interim CEO Michael Singer confirmed that there's a lot of interest from other executives in leading the cannabis company and taking over for Booth. Singer doesn't plan to hang on to the position, and that means there will likely be a polished executive from another industry that will take over at some point. 

Singer says there's been interest in the job from people in the consumer packaged goods industry. Cannabis products are diverse, and the popularity of hemp is creating more opportunities for the industry, especially in consumer packaged goods. Industry giant Unilever (UL 0.59%), through one of its subsidiaries, gained exposure to the industry when Schmidt's Naturals announced last year that it would produce deodorant products containing hemp or cannabidiol (CBD). 

Crossover from that industry may make a lot of sense for Aurora, and it's one reason for investors to get excited. A seasoned executive with experience running a large consumer goods company, or any other industry for that matter, who knows how to consistently turn a profit could be integral in helping Aurora improve its operations and become a more investable company.

Is Aurora a buy today?

Aurora is an appealing option for cannabis investors, and while its risk level may be lower, that's not quite the same as being a risk-free investment. There are still concerns about cash burn and the company's ability to continue growing, especially if the stock remains this low.

It's not a suitable investment for risk-averse investors, but if you're comfortable with the level of risk in the cannabis industry, Aurora is making moves that could make 2020 a much better year for the pot stock than 2019 was.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.32 (-3.65%) $0.05
Unilever PLC Stock Quote
Unilever PLC
$45.83 (0.59%) $0.27
Canopy Growth Stock Quote
Canopy Growth
$2.85 (-18.57%) $0.65
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$2.72 (-9.02%) $0.27
Curaleaf Holdings, Inc. Stock Quote
Curaleaf Holdings, Inc.
$5.05 (-0.39%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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