Stay away from Aurora Cannabis, this investor says

The news has been dismal for Canada’s pot sector companies lately, including Aurora Cannabis (TSX:ACB), which has lost a whopping 76 per cent of its value since March.

The stock may look cheap now but who really knows? That’s portfolio manager Ross Healy’s take when he claims that without clear earnings prospects, putting money in pot stocks is pure gambling.

Canada is preparing for the launch of Cannabis 2.0, headed to a retailer near you in a matter of weeks with edibles, drinkables and all manner of cannabis derivatives now legal for consumption. The industry is betting big that the new legit market in pot chocolates will give a much-needed boost to a faltering sector, where revenue numbers have sagged instead of ballooned and a slower-than-anticipated rollout of pot stores across the country has stunted growth, chopped valuations in half and all but dried up capital interest in the space.

Edmonton-based Aurora Cannabis in a case in point.

The company was a bulldozer of a business early on in the pot frenzy, completing bought deals worth hundreds of millions, scooping up acquisitions left and right and orchestrating huge build-out plans for
greenhouse operations across Canada and internationally.

All that hustle put ACB on the map and gave investors reasons to believe that big earnings on bigger revenues were just around the corner.

Now, reality has surely set in, with Aurora being one of a number of major cannabis companies to report declines in revenue over the most recent quarter, while profits remain a future consideration.

Aurora reported revenue of $75.3 million for its first fiscal quarter 2020, delivered in mid-November, which was up from $29.7 million a year ago but lower than the $94.6 million from the previous quarter. The top line missed analysts’ estimates as did ACB’s adjusted EBITDA which generated a loss of $39.7 million, more than double the expected loss of $18.6 million.

At the same time, management announced that it would be pausing construction at both its Aurora Nordic 2 facility in Denmark and its Aurora Sun facility in Medicine Hat, Alberta, in order to save money.

“We're making sound decisions in reducing capex based on global demand,” said CEO Terry Booth during the quarter’s conference call.

Aurora’s troubles have taken the stock from a high of $13.67 per share on March 19 to sub-$4.00 territory where it has languished since the quarterly report in mid-November.

And while Aurora’s depressed valuation is likely to pique the interest of more than a few investors on the hunt for bargains, Healy says to stay away.

“The cannabis sector has been taken to the woodshed and thoroughly thrashed, however, that doesn’t necessarily make them good value,” said Healy, chairman of Strategic Analysis Corporation, who spoke to BNN Bloomberg on Wednesday.

“A couple of the energy stocks are down 90 per cent, so if you’re down only 75 per cent is that bad? Not when there are no earnings and sales are uncertain,” he said.

“I think that you take your heart in your hands when you buy the cannabis stocks and I do honestly say good luck to you but I can’t see the fundamentals turning yet,” he said.

“That is not called investment, it’s called speculation. If you want to speculate, take the money that you would be willing to lose if you went to Las Vegas and put it in.”