Punk rock group The Clash framed one of the most important questions ever in the lines of the memorable song, "Should I Stay or Should I Go?" That's a key question that investors should ask themselves from time to time with respect to the individual stocks that they own.
One such stock that I suspect many investors are evaluating right now is Aurora Cannabis (ACB 0.82%). Some who bought Aurora are no doubt wishing they had bailed out sooner. The marijuana stock is down close to 85% over the last 12 months. Others, though, who invested in Aurora last month might not be so quick to action after more than doubling their money.
Should you sell Aurora Cannabis stock? Here's your definitive answer.
Good reasons to sell
Whether or not to sell any stock is a decision that only you can make for your personal situation. The right choice for one person could (and often is) different than the right choice for another person. So when should you sell a stock? There are three primary scenarios that are good reasons to sell.
First, if you absolutely need money and don't have another viable option to raise cash, sell. Many people are going through tough times right now in the wake of the COVID-19 pandemic. Selling stocks when money is needed is fine. It's usually best, however, to sell your losers instead of your winners. It can help lower your taxes. And letting winners ride tends to be a smart investing move.
Another reason to sell a stock is if you're no longer confident in the assumptions you made when you initially invested. It could be that you feel that management isn't capable of executing as you thought they could. Market dynamics might have changed. Whatever the case might be, if your confidence is blown, the stock should be gone.
The third main reason to sell a stock is if you feel strongly that you could make a higher return by investing elsewhere. This is a subjective call, of course, and you could later find out that you were wrong to second-guess yourself. Sometimes, though, it can be obvious that there are better stocks to buy. Trading up is a smart move in that case.
Does Aurora deserve your confidence?
Let's focus on the second scenario for selling -- when you lose confidence in the assumptions you originally made about buying a stock. Ask yourself the following question: Does Aurora deserve your confidence?
A key to answering that question is how you feel about Aurora's management team. The glaring problem is that the company doesn't have a permanent CEO in place. Michael Singer, Aurora's chairman, is acting as interim CEO. Singer stated in the company's Q3 conference call last month that Aurora should announce a new CEO within the next few months.
Another step in determining if Aurora deserves your confidence relates to whether or not the company is moving in the right direction and, if so, can it continue to do so. There were reasons to think that Aurora is moving in the right direction in its Q3 update. The company generated strong revenue growth. It's tracking positively on all of its key metrics that management uses to evaluate corporate performance.
The most important factors in addressing the confidence issue with Aurora, though, are your long-term assumptions about the company's growth prospects. Do you still believe the cannabis market will grow significantly? Do you think that Aurora will be able to execute well enough to capture a sizable market share? As mentioned earlier, different investors might answer those questions in different ways.
The definitive answer
We still haven't gotten to that promised definitive answer to whether or not you should sell Aurora Cannabis stock at the outset. I think that answer is an easy one. And it ties into the third good reason for selling a stock: Sell when you can make a higher return elsewhere.
Investing involves balancing potential risk versus reward. Are there stocks that offer better risk-reward profiles than Aurora Cannabis does? Absolutely yes.
You don't have to limit yourself to marijuana stocks. There are plenty of stocks in other industries that without question have tremendous growth prospects and are less risky than Aurora. And it's the same story if you want to bet on the cannabis opportunity,
My suggestion is to look to the U.S. It's the biggest marijuana market in the world, yet Aurora can't compete in it (except for dipping its toes into the CBD market).
Take Green Thumb Industries (GTBIF 10.99%), for example. Its revenue is growing faster than Aurora's is. GTI is already generating positive EBITDA while Aurora is only hoping to do so within the next few quarters. GTI's balance sheet also is much stronger than Aurora's is. Its market opportunity in the U.S. is larger than Aurora's is.
You might think that with all of these advantages, GTI would trade a lot higher than Aurora does. On the contrary, its market cap is only 27% above Aurora's market cap.
Should you sell Aurora stock? If you can find a stock with a better risk-reward profile, the answer is a resounding "yes." That search shouldn't be a difficult one, making the question an easy one to answer.