The clearance sale has finally arrived in the cannabis sector, as many had expected. Aurora Cannabis (ACB) was particularly hard hit as the stock lost almost 50% within two weeks. Investors should not be surprised, nor should they be surprised by the sell-off, given the many warning signs that began to flash in the weeks before the crash. We will not repeat much of what we say in "Are we going into a new meltdown for pot stocks?" What raised, why the sell-off was expected and overdue. The purpose of this article is twofold:
- How long could the sell off last and is it over?
- What should Aurora investors do in this phase of the downturn?
(All amounts in C $, unless otherwise stated)
About the sale
First of all, it is important to understand the recent sell-off in Aurora and the broader market related to the development of the cannabis market. The Canadian cannabis market, including Aurora, was in the limelight in 2015 when Trudeau was chosen with a pledge to legalize cannabis in Canada. The market underwent a period of relative stability in 2016, but 2017 was the year investors turned to the cannabis sector. The popular Marijuana Horizons Life Sciences ETF (OTC: HMLSF) was launched in April 2017, just in time before the market hit the market a few months later. The ETF began drifting its initial NAV of $ 10, but the rally, which started in late 2017, raised the ETF to over $ 22 a share by mid-January. The sell-off that started at the end of January continued into August, accompanied by continued volatility in the first six months.
If the story is a clue, we could look at the sell-off in January 2018 to see how long it took and what ended the sell-off. Crucial is that the current sell-off is still a correction of the rally since the end of August. The sector is still highly valued and investors who entered in 2017 still bet on profits despite the recent weakness. We also understand that investors who hit the market in 2018, especially in the forefront in late 2017 and the end of August this year, were frustrated because they are likely to face major losses. The point that we are trying to formulate here is that the cannabis sector remains healthy and not "crashed," as some media reports. In addition, investors should not compare the current correction with the cryptocurrency speculative crash as the cannabis sector remains a viable industry.
Another important fact is that stock markets worldwide were under heavy selling pressure. High-growth sectors such as technology have sold off, which has likely exacerbated the downturn in the cannabis sector we are experiencing.
What should I do?
As we have shown above, there is no need to panic and think that the cannabis market is fueling. The market remains well above the 2017 level. The volatility in 2018 was due to investors' unprecedented interest and the burgeoning nature of the industry. Investing in a new sector is not without risks and we believe the market will remain well positioned in the long run as a viable industry.
For investors involved in bottom fishing, we think the timing is premature, as it is unlikely that the correction will reverse in the foreseeable future without new catalysts. The last sell-off in January 2018 took six months thanks to the $ 4 billion investment by Constellation (STZ) in Canopy (OTC: CGC). Although we believe that companies such as Altria (MO), Coca-Cola (KO), Diageo (DEO) and PepsiCo (PEP) have many opportunities to invest in a cannabis company such as Aurora, the timing of such transactions is unpredictable highly speculative. Executives from these companies are currently watching the sector on the sidelines, as there is a consensus that cannabis companies are currently overvalued. Not every company will follow a similar strategy to Constellation with Canopy, and we think that investors should not expect another White Knight to appear for a quick rescue the next day.
Aurora remains well positioned as a leader in the global cannabis market for several reasons. The company has one of the largest manufacturing facilities in the world, enabling it to produce at extremely low cost and throughput. Aurora has also aggressively expanded its hemp capabilities by acquiring European and Latin American hemp assets. Aurora has signed supply agreements with major Canadian provinces and has one of the largest medical cannabis patient bases, a segment that is expected to continue growing after the legalization of leisure sales.
For investors who wonder why Aurora's share price has dropped so much in 2018, we've set out our views in detail recently in The Spectacular Rise And Stall Of Aurora Cannabis. What surprised many investors was the fact that Aurora's NYSE listing did little to stem the decline last week. As we have said many times, the quotation was previously telegraphed and any price increase has already been incorporated into the stock price. A listing by itself is not a recipe for long-term success, since Tilray (TLRY) was an outlier in our view and can not be replicated. We agree that most US-listed cannabis stocks have a higher price than their Canadian peers such as Cronos (OTC: CRON), but due to the fact that cannabis stocks are heavily influenced by the US no causal relationship can be established prevailing market conditions. Cronos is trading at a premium because it comes to market at a favorable time when US investors are increasingly interested in cannabis stocks, but it does not mean that Aurora would receive the same treatment as the market is now selling off.
Aurora remains a viable option for investors to engage in the burgeoning cannabis industry. The stock has suffered heavy losses from a sell-off in the cannabis sector and the further decline in the stock market. However, we believe investors will have another round of opportunities to invest and wait for the next catalyst as valuations shift to pre-August levels. The most likely catalysts for the sector are an investment by a major beverage, spirits or pharmaceutical company or substantial progress in the legalization of cannabis in the US. Investors should be patient and avoid catching a falling knife as we believe there are opportunities for more attractive prices. It's not a bad idea to think about depreciating Aurora or reinvesting in Aurora (if trimmed or sold out before the crash), but the timing is difficult to predict and investors should be cautious. We will continue to cover the sector and hopefully share useful information, including potential entry points should they appear.
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disclosure: I / we have no positions in the above stocks and do not plan positions within the next 72 hours.
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