Could Aurora Cannabis Earnings Spark New Cannabis Rally?

Could Aurora Cannabis Earnings Spark New Cannabis Rally?
Could Aurora Cannabis Earnings Spark New Cannabis Rally?
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To say that the cannabis sector is overdue for a rally is a monumental understatement. Valuations for North American cannabis stocks have gone from being merely “cheap” to being a complete giveaway.

Share prices have headed straight down all summer. Canadian stock valuations (as represented by the Marijuana Index) are at a two-year low. But what has actually been happening in the cannabis industry?

In Canada, the sector has reported three consecutive months of double-digit sales growth, up to the latest data from the end of June. Canada’s provinces are finally reaching a critical mass in terms of cannabis retail outlets.

Meanwhile, Phase 2 of legalization approaches in October. This is expected to add an estimated three million new consumers to the Canadian cannabis market, an increase of roughly 50%. Not only are retail sales likely to continue this robust growth, they could easily accelerate.

This leads to the upcoming Q4 and full-year earnings from industry heavyweight, Aurora Cannabis (US: ACB / CAN: ACB). The company will be reporting after hours on September 11th.

At least one source is predicting that Aurora will surprise to the upside, much like fellow pot giant Aphria Inc (US: APHA / CAN: APHA) did recently.
Like Aphria, Aurora is all about increasing crop yields through the use of innovative cultivation techniques, but, more importantly, Aurora has demonstrated an encouraging trajectory of late.

In the first quarter, Aurora beat on earnings and its tripled sales numbers. With a growth strategy poised to profit from the success of international markets, Aurora could see its top-line numbers continue to fly higher as further efficiency improvements are made at the operational level.

There is a massive disconnect between the trend in cannabis stock valuations and the trend in the cannabis industry – especially in Canada. While the former has been moving relentlessly lower, the latter has been getting progressively more bullish, as noted above.

Marijuana stock valuations for Canadian companies are at multi-year lows, in a growth industry that is still in its infancy. Absurd.

This can’t continue. Something is going to trigger a massive revaluation of cannabis stocks. If it’s not Aurora Cannabis earnings, then it will be the breakout of some other industry heavyweight, or perhaps simply some large deal.

Why wasn’t Aphria’s earnings such a catalyst? The news came out during the (relative) quiet of summer, with valuations in free-fall.

Now it’s Fall. Investors are fully tuned in. Most importantly, the downtrend in valuations may have bottomed.

The modest uptick in the Marijuana Index in recently days certainly can’t be called the start of a rally (at least not yet). But it could very well mark a significant bottom. Valuations simply can’t go much – if any – lower.

How fast can  Canadian cannabis stocks run when the industry goes on a tear?

From October 20, 2017 to January 9, 2018 (a mere 82 days), the entire Index quadrupled, going from 260.50 to 1045.40. A decade of robust returns squeezed into less than three months.

The difference between October 2017 and September 2019? In relative terms, cannabis stocks are much, much cheaper today.

The industry hasn’t been standing still for the last two years. Yet all the gains in valuations during this time have now been wiped out by an irrational reversal in the valuations of Canadian cannabis companies.

Merely returning to previous highs would require the index to more than double. That would seem to be the bearish scenario for the Next Rally in the cannabis space.

Industry earnings for Canadian cannabis companies will be substantially better going forward. This is simple arithmetic. Month after month of (compounding) double-digit sales gains will show up on both the topline and bottom-lines of these companies.

A good day for Aurora on September 11th could spell more than a jump in the price of ACB. It could be a springboard for the entire Canadian cannabis industry.

With U.S. marijuana stock valuations equally pitiful at present, such a change in sentiment would almost certainly produce a reciprocal surge in those stocks as well.

Valuations in Canadian cannabis stocks have marched relentlessly lower for roughly six months. This nearly matches the previously longest downturn in cannabis stocks: seven months, from January 2018 to August 2018. It also nearly matches that downturn in depth.

That previous trough represented a plunge of roughly 54% for the Index. The current crash represents a decline of just under 50%, despite the recent months of strong revenue growth in Canada. When the industry went through its major reversal at the start of 2018, there were virtually no revenues being generated.

A massive disconnect. A massive opportunity.

Will Aurora’s earnings be the catalyst for that rally? No one can say with certainty. But with a bottom perhaps in with stock valuations, many cannabis investors will look at this news (and this sector) as a good bet.
Marijuana Investing
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