It Isn’t an Accident That Aurora Stock Is This Cheap

Will Healy

Tue, May 28, 2019, 7:35 AM

Many point to relative valuations as a reason to buy Aurora Cannabis (NYSE:ACB) stock. While most marijuana stocks trade at multiples exponentially higher than S&P 500 averages, ACB stock has lagged most of its peers. However, despite this lower valuation, investors should avoid the assumption that Aurora stock will catch up.

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I surmised in a recent article that traders should wait for ACB stock to report its earnings before buying. ACB lacks a catalyst and has failed to break out of the approximate $8-$10 per share range established early in the year.

Aurora stock steadily dropped until earnings. While the stock enjoyed a brief post-earnings bump, it has since given back most of that gain. It trades at around $8.25 per share at the time of this writing.

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Many have cited the fact that ACB trades at a relative discount to its peers. They have a point. The price-to-sales (PS) ratio of around 67 is lower than that of Canopy Growth (NYSE:CGC) at over 133. It also comes in lower than Tilray (NASDAQ:TLRY), which supports a PS ratio of 77 despite falling by about 85% from its 52-week high.

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Moreover, the 357-plus PS ratio of Cronos Group (NASDAQ:CRON) does not fare well against any of its peers. When also considering that Aurora leads each of these market leaders in production, the case for Aurora Cannabis stock makes sense on the surface.

However, compared to the overall market, even the 67 PS ratio seems stratospheric. The buying frenzy surrounding cannabis stocks has made valuation metrics all but irrelevant. Hence, I go back to my earlier conclusion that ACB stock needs a catalyst to break out of its range.

Future events could bring the sales multiple in line with that of CGC stock. However, the lack of news could take that multiple down just as easily.

When Aurora Cannabis reported earnings on May 15, it did not get the needed motivation. Traders initially bid ACB stock higher before it gave back most of its gain. For now, it still remains range-bound.

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So where does it get this catalyst when neither valuations nor the charts can offer an incentive to buy? The most obvious possible impetus could come from outside interests. Aurora has yet to attract a large investor in the alcohol or tobacco industry such as Canopy investor Constellation Brands (NYSE:STZ) or Altria (NYSE:MO), who took an ownership stake in Cronos.

Conversely, it could do something investing itself and add a stake in the U.S. hemp industry. Thus far, Aurora has declined to make this move, even though it gives Canadian marijuana companies a segue into the U.S.

Also, as our own Will Ashworth points out, Canada’s weed legalization did not initially apply to edibles or cannabis-infused drinks. Both will become legal in October. Perhaps the anticipation of these products will lead to a run-up in ACB stock comparable to the one seen last fall.

However, if that happens, marijuana stocks could also suffer from a similar “sell the news” phenomenon. Hence, investors will have to look at that as more of a trade than a longer-term buying opportunity.

Either way, despite its lead in production, ACB stock remains deficient to its peers in key areas. Until the company catches up to its competitors, I think the market has correctly valued Aurora stock at a lower multiple.

The bottom line on Aurora stock

Given the lack of high-profile outside investors and a position in the U.S. hemp industry, ACB may struggle to catch to the multiples achieved by most of its peers.

The company’s lead in production capacity ensures that Aurora Cannabis will remain an industry leader for the foreseeable future. For this reason, many investors have concluded that its lower PS ratio justifies buying Aurora Cannabis stock.

However, ACB stock has traded in a relatively tight range since January as neither valuations nor charts give investors a reason to bid Aurora’s stock price higher.

Moreover, the company has failed to attract a major outside investor. It has also lagged its neighbors in the potentially lucrative U.S. hemp market. Until these factors change, ACB may not deserve the higher multiple attained by Canopy Growth and other peers.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.