Marijuana Investors: Why Aurora Cannabis (TSX:ACB) May Actually Be the Cheapest Stock on the TSX Index – The Motley Fool Canada

Marijuana Investors: Why Aurora Cannabis (TSX:ACB) May Actually Be the Cheapest Stock on the TSX Index - The Motley Fool Canada
Marijuana Investors: Why Aurora Cannabis (TSX:ACB) May Actually Be the Cheapest Stock on the TSX Index
Aurora Cannabis Inc. shares dropped Monday after Stifel Nicolaus analyst Andrew Carter told clients it was time to sell, noting that though the headlines of the Canada-based cannabis companys latest quarterly report were bad, the details of the results were even worse.

Carter downgraded Auroras stock to sell, a little more than three months after initiating coverage with a hold rating. He slashed his price target on the Canada-listed stock to C$5, which is 32% below current levels from C$7.

The Canada-listed shares ACB, -7.24%  shed 6.2%, while the U.S.-listed shares ACB, -7.56%  slumped 5.8% in active morning trading. Volume topped 15 million shares around 11 a.m. Eastern, compared with the full-day average of about 13.3 million shares, according to FactSet data.

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Aurora reported last week a wider-than-expected fiscal fourth-quarter loss and revenue that missed lowered expectations, sending the stock tumbling over 9% last Thursday. See Cannabis Watch.

Stifels Carter helped weigh on the stock immediately after the results by saying he believed the stock would remain under pressure given expectations that it would need to access the capital markets for a significant ask to fund its aggressive growth plans.

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But Carter said on Monday that Auroras efforts to tap the capital markets will be challenged given the overwhelmingly negative investor sentiment towards the cannabis sector, damaged credibility and limited near-term catalysts to drive investor enthusiasm.

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In a note titled The headlines were bad, the details were worse: Downgrade to sell on Monday, Carter said the fourth-quarter results point to a less robust in-market performance and difficulty to continue positioning for the larger global opportunity.

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Our outlook suggests significant downside potential for the shares of Aurora over the near term, given it will be difficult for the company to continue positioning for the larger global opportunity within the confines of significant financing risk that could challenge the companys ability to fully embrace the level of investment needed to be a leader not only in the global cannabis category but also in Canada, Carter wrote.

He said he believes the company will remain challenged until it can attract an investment from a consumer partner.

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Carters call for a consumer partner comes after Corona-beer parent Constellation Brands Inc STZ, -0.22%  made a $4 billion investment last year in Canopy Growth Corp. CGC, +1.75% WEED, +1.46%  , which led to the ousting of high-profile co-Chief Executive Bruce Linton, and after cigarette seller Altria Group Inc. MO, -1.48%  said it would pay the equivalent of $1.8 billion for a 45% stake in Cronos Corp. CRON, -0.22% CRON, -0.20%

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Carter said Aurora will likely have trouble competing with rivals Canopy Growth and Cronos in the global cannabis market until it can tout a partnership with a well-established and vested consumer partner. While those partnerships helped provide significant capital de-risking for Canopy Growth and Cronos, the risk has increased for Aurora given the recent volatility in the equity markets and uncertainty over Auroras willingness and ability to attract a partner.

Aurora has given mixed commentary on pursuing partnerships, but we believe the company will be required to continue pursuing an independent path with global consumer companies likely taking a wait-and-see approach to the sector with less incentive to partner with a Canadian L.P., Carter wrote.

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Auroras stock has tumbled 26% over the past three months, while the ETFMG Alternative Harvest exchange-traded fund MJ, -1.80%  has slumped 20% and the S&P 500 index SPX, -0.31%  has gained 3.9%.

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Tomi Kilgore is MarketWatchs deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.

Several analysts lowered their target prices due to Aurora Cannabiss dismal first-quarter earnings. Eight Capital, Cowen and Company, and PI Financial cut their target prices. PI Financial cut the target price to 12 Canadian dollars from 15 Canadian dollars with a buy rating. Eight Capital cut the target price to 12 Canadian dollars from 15 Canadian dollars. Also, Cowen and Company cut the target price to 12 Canadian dollars from 15 Canadian dollars.

The Motley Fool Canada Cannabis Stocks Marijuana Investors: Why Aurora Cannabis (TSX:ACB) May Actually Be the Cheapest Stock on the TSX Index

In contrast, Aphria (APHA) reported strong fourth-quarter results. The company reported a better-than-expected top line of 128 million Canadian dollars. Aphria also reported a better-than-expected bottom line of 15.8 million Canadian dollars. The company reported a positive adjusted EBITDA of 0.209 million Canadian dollars. To learn more, read Aphria Has Analysts Feeling Optimistic—Heres Why.

You’ve probably heard of value traps — seemingly cheap stocks with ridiculously low valuation metrics that are anything but. Troubled businesses with decaying fundamentals can appear cheap, but relative to their growth prospects, they may be absurdly expensive and leave investors at risk of substantial downside.

Over the past 12 months, Aurora Cannabis stock received increased coverage from analysts due to its strong fundaments. The company also increased its guidance. Aurora Cannabis expected to report a positive EBITDA in the fourth quarter, which boosted analysts confidence in the stock. The number of analysts covering the stock increased from four to 15 during this period.

What you may not have heard of are stocks that seem ridiculously expensive but are actually screaming bargains. I’m not sure if there’s a word dedicated for such stocks, but let’s call it a fundamental bear trap, even though the term bear trap actually denotes a technical pattern.

Overall, 15 analysts covered Aurora Cannabis before its results. The consensus target price for the stock fell to 11.96 Canadian dollars from 13.23 Canadian dollars before the earnings. The target price fell 9.5%. Aurora Cannabis closed at 7.87 Canadian dollars on September 13. Currently, the revised target price means a potential upside of 52% over the next 12 months.

One such stock that I believe is an expensive-looking stock that is actually severely undervalued given its growth prospects is Aurora Cannabis (TSX:ACB)(NYSE:ACB).

Canopy Growth (CGC) (WEED), another significant cannabis player, also reported disappointing results for the first quarter of 2020 last month. The companys first-quarter revenues missed analysts estimates by a wide margin. The company reported huge losses during the quarter. To learn more, read Canopy Growth: Analysts Views after Its Earnings.

The Edmonton-based cannabis kingpin is a rapidly growing company that few investors (or analysts) can get a firm grasp of. The industry is hazy and the valuation is out of this world, but the growth potential is also just as unfathomable.

The overall strong-buy rating remained unchanged from the period before the earnings release. However, an equal number of analysts recommended the stock as a buy and a hold before the earnings. The company missed its revenue and profitability guidance, which might have caused the target price and ratings to change.

While pot stocks aren’t everybody’s cup of tea, I do believe that such names that seem way overvalued, like Aurora Cannabis and its 43.6 times sales multiple, may be suitable for value investors with long-term investment horizons, even though pot stocks have always been a trader’s playground.

At the time of writing, Aurora is down by over 10% in after-hours trading following the release of its fourth-quarter results that fell short of expectations on the revenue front.

On another note, a Market Insider report stated that Amplify Seymour Cannabis ETF manager Tim Seymour said, Aurora should be able to hit its goal by the second quarter of fiscal 2020. He thinks that the company should focus on improving its gross margin.

Revenues rose to $98.9 million, missing the Street consensus of $108.3 million. Although sales were up triple digits on a year-over-year basis, investors were expecting a bit too much from the cannabis kingpin that’s on the right track when it comes to the pathway to profitability.

As of September 13, Canopy Growth has a consensus buy rating with a target price of 55.7 Canadian dollars. The target price represents an upside potential of 53% from the closing price on September 13. Canopy Growth closed with a gain of 4%.

Management seems optimistic that Aurora is going to be profitable in 2020, but given the moves, many investors seem to think it’s all smoke and mirrors.

Aphria has a consensus buy rating with a target price of 14.9 Canadian dollars. The target price represents an upside potential of 67% from the closing price on September 13. Aphria closed with a gain of 1.0%.

In any case, the quarter was more mixed than the after-hours move in the stock would suggest. The average net selling price of cannabis continues to fall, and while the stock will continue to be a roller-coaster ride over the next few weeks, Aurora stock is a strong buy because it looks cheap at $8 and change relative to its very encouraging growth prospects and overlooked progress made in the latest quarter.

Yes, there’s uncertainty on the horizon, but as the industry matures, I do see Aurora as one of the market leaders that’ll command triple-digit growth over the medium term and high double-digit growth over the extremely long run, as the international taboo on cannabis slowly but surely fades.

Today, CNBC reported that HSBC upgraded Lyft and Uber to buy ratings from hold ratings. Lets see how both stocks have been trading since their IPOs.

After shedding nearly half its value, Aurora Cannabis is finally a value investment and not a speculation that Fools should feel confident buying on the post-earnings dip.

The first wave of cannabis legalization minted millionaires out of everyday investors, and it might be about to happen again.

Because when edibles are legalized in Canada on October 17th, experts project a new $2.7 BILLION market will be born.

Our last legalization stock pick is already up 1,211%, and now were recommending one tiny small-cap stock before Cannabis 2.0.