Earlier this year following the double whammy of a Democratic presidential win and gaining a hold of the Senate, hopes were high for the U.S. cannabis space. With pot sympathizers on the left in charge, it was assumed federal legalization – or at least favorable concessions for the industry – were just around the corner. But that unfortunately hasn’t happened yet, although it appears only a matter of time until some sort of change in legal status is enacted.
With the prospect of an entry into the lucrative U.S. market, Canadian cannabis stocks soared at the turn of the year, and Aurora Cannabis (ACB) benefitted from the rally too. Shares peaked at $18.92 in February, but since then, as the legislation process has stalled, the share price has reflected the lack of action, and has dropped 63%. The new toned down share price makes a lot more sense, says Jefferies analyst Owen Bennett.
“While operational weakness persists (both Canadian share losses/financial losses continue), and ACB’s $1bn shelf means some kind of US move is much more likely, the reality of this situation is now much better reflected in the price,” the analyst said.
Accordingly, Bennett upgraded his ACB rating from Sell to Hold, although at the same time, the price target is slashed from C$9.44 ($7.54) to C$8.56 ($6.84), indicating shares would stay range-bound for the foreseeable future. (To watch Bennett’s track record, click here)
So, it’s a pat on the back and simultaneous slap in the face. Bennett justifies the reduced price target due to a Canadian market performance which has been “very poor.” Additionally, the analyst has often stressed the importance of US optionality for Canadian names and as is generally well accepted, agrees the prior lofty share price reflected the “excitement” around the election time developments. The share price drop is now more representative of where the company is at, which merits the rerating, but on the US CBD front, Aurora has done “little to build any sort of conviction.”
Investors should be wary, says Bennett, of assigning “too much value” to the U.S. options seemingly available to Aurora. For one, as a Canadian operator hoping to acquire US assets, the multiple paid will “likely be greater than what we are seeing with domestic players.” And then you need to calculate whether Aurora is actually equipped to take market share. “Based on Canadian/US CBD trends,” the analyst summed up, “Conservative assumptions discounting greater risk are warranted.”
Turning now to the rest of the Street, where interestingly for a such a formerly popular stock, its downfall is also reflected in analyst interest. Over the past 3 months, Bennett’s review is the sole one on record. (See ACB stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
