If you thought the stock market had taken off in the past two months, take a closer look at how marijuana stocks have evolved since early April 2019. After the first quarter of 2019, which saw many cannabis stocks explode . in the stratosphere, the last 13 months have erased from 50% to 95% of cannabis stock valuations.
Note that the long term prospects for the legal cannabis industry are bright. Tens of billions of dollars in black market sales are made every year, which means there is a very real opportunity to move these illicit users to legal channels over time. But in the short term, stocks of U.S. jars were crushed by high tax rates, as Canadian cannabis companies faced bottlenecks and shortages, according to the province.
Aurora Cannabis disappointed investors’ ‘high’ expectations
Maybe not broth stood out more for all the wrong reasons than Aurora Cannabis (NASDAQ: ACB). Aurora Cannabis was the most held stock on the Robinhood millennial-focused investment app for months on end, but is down almost 92% since mid-March 2019. For new investors who get a first look at what investing is purchase and conservation, Aurora set a bad example.
At one point, it was a company that seemed to be on track to dominate Canada with its peak annual production, and it was a projected leader in international expansion. The company’s 15 production sites, if fully built and operational, are expected to generate at least 660,000 kilograms per year, with Aurora having a production, export or research presence in 24 additional countries, beyond from Canada. In short, it had to be a low-cost production giant that countries would line up with to sign wholesale supply agreements.
Aurora Cannabis was also expected to land a brand partner and / or an equity investor as a result of the Billionaire activist investor Nelson Peltz hires as a strategic advisor. Peltz’s track record leans heavily towards consumer packaged product companies in the food and beverage industries, which would make him the perfect match for forging a partnership or capital investment between a branded company and Aurora Cannabis. .
Unfortunately, none of those far-fetched expectations even came close to hitting the mark. In fact, every two weeks it seems Aurora Cannabis gives investors another reason to sell and not look back. This week I have a whole new reason … or should I say nearly 21.2 million of them … why Aurora is such a terrible stock.
21.2 million more reasons why you should avoid Aurora Cannabis like the plague
Over the past five months, the Aurora Cannabis share price has lost 71% of its value and has steadily fallen below $ 1 on the New York Stock Exchange (NYSE). Aurora is adopt a reverse division 1 to 12 in the coming weeks to come into compliance with the NYSE to avoid delisting. All the while, Aurora’s press releases have suggested that while the short term remains difficult, the company remains on track to execute for the long term.
But do you know what is missing over the past five months? Executives put their money where they say it is and align their interests with those of their shareholders. With the exception of former CEO Terry Booth who acquired 73,500 shares between $ 2.06 and $ 2.09 in early January, there has been no insider buying at Aurora Cannabis.
On the other side of the coin, sales have been plentiful. After Booth stepped down as CEO, he sold nearly 12.2 million shares of his holdings in mid-March, at an average price of $ 0.66 to $ 0.91 per share. Just over a week later, Aurora chairman Steve Dobler sold 8 million shares for between $ 0.70 and $ 0.72. Additionally, in mid-December, independent director Jason Dyck sold nearly 1.1 million Aurora shares for $ 2.35. In total, that’s about 21.2 million Aurora shares sold by company insiders and 73,500 shares acquired as Aurora’s share price fell another 71%.
Though there is a number of reasons insiders might choose to sell stocks, including to cover their income tax, such a crushing sell-off in the face of unprecedented share price weakness does not really inspire hope in management’s message that the company remains on track.
Aurora Cannabis’ toll is a house or horrors
If that isn’t enough to keep you away from investing in Aurora Cannabis, just dive into the company’s balance sheet and I’m sure you’ll be convinced. From top to bottom, it’s a house of horrors.
First, we see a company that lack of sufficient capital to meet future obligations. When filing its MD&A in mid-February for the second fiscal quarter ended December 31, 2019, it was estimated that the liability over the next 12 months would total nearly C $ 374 million. But according to a recent press release, Aurora Cannabis only had C $ 205 million in cash and cash equivalents on its balance sheet.
In order to raise additional liquidity, the only recourse of the company has been to issue common shares. Having recently completed a $ 400 million (US) market share offering (ATM), the company has announced its intention to launch a $ 350 million ATM offering moving forward. Or, to sum up, Aurora has swelled its stock count from 16 million to 1.31 billion in less than six years, and its management team now has the green light to continue to dilute existing shareholders by issuing up to 479. million additional shares (based on a close of $ 0.73).
It is also a business that is hugely burdened with goodwill – that is, the premium paid for acquisitions beyond tangible assets. Even after goodwill impairment of C $ 762.2 million in the second fiscal quarter, Aurora Cannabis still has approximately C $ 2.41 billion of goodwill on its balance sheet. This is practically double its current market capitalization and represents 52% of total assets. As the company has virtually no chance of recovering this bonus in the future, I consider another significant impairment as highly probable.
To sum up, there are no good reasons for investors to bet on Aurora Cannabis.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.