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Buy Canopy Growth instead of Aurora Cannabis, this investor says

Canopy Growth

Canopy Growth
John Zechner
What’s a cannabis investor to do with a stock like Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:ACB)? Down a mile from where it stood two years ago and now continuing to dilute shares with a new bought deal, is it time for long-suffering ACB investors to throw in the towel? Maybe not, says portfolio manager John Zechner, who advises to hold on for a while longer.

“You’ve got quite a wild ride on that one, from euphoria to the depths of despair,” says Zechner, chairman and founder of J. Zechner Associates, speaking on BNN Bloomberg on Monday. “I tend to think that right now the valuations across all the [cannabis] names are still quite high — I won’t say insane or crazy but they’re pretty exceptionally high for what you’re generating.”

“But with some of the features that we’re seeing in some of the growth stocks and with what we’re seeing in terms of the legislation in the US, I’d probably be more inclined to start looking at the long side, the buy side, on a few names,” says Zechner.

It’s true that cannabis was in the doghouse for a good year and a half there when some of the shine started to wear off still fairly new companies who had been promising the moon in terms of growth in Canada’s nascent marijuana sector but more than a year out from legalization had not only failed to deliver but in many cases looked to be a downright mess.

Supply issues and a slow rollout of retail stores across the country were to blame but so were cannabis companies who in the rush to get big vastly overspent on assets and then took major writedowns once the realities of the still-growing cannabis market set in.

Aurora Cannabis was a prime example of the trend, and the company spent like a drunken sailor in its earlier days, most egregiously on fellow cannabis LP MedReleaf for which it paid $3.2 billion in 2018, but then had to scale back its build-out of facilities both in Canada and abroad. Then company had a mini-implosion earlier last year when it took a $1-billion writedown, lost its CEO and ended up consolidating shares on a 12 to 1 basis in order to stay on the NYSE.

But for a number of reasons the cannabis scene looks a shade different in 2021. The Canadian market is getting its feet under it and spreading out with new stores especially across Ontario, the COVID-19 pandemic has been a surprise for cannabis as demand was strong throughout 2020 and in the US, where cannabis companies have been sizzling hot for a while now, movement on the federal regulatory level looks much more promising with Democrats now holding the majority in the House of Representatives and the Senate.

Overall, the mood seems better for cannabis, according to Zechner.

“I’d probably put Canopy Growth further up the list [than Aurora] because I think it has better ownership and probably better branding possibilities, but Aurora, given their size and the acquisitions and the combinations they’ve done stands pretty well,” Zechner said.

“I guess the bottom line is I would not be selling it at this point,” he said. “You’ve taken quite a ride so far and it’s early in the year so it’s not tax loss time so I’d be inclined to stick with it and see.”

“Within the sector I hadn’t looked at the names in quite a while and we were actually short them about a year ago, but I’d probably be looking more to the long side of some of those names now,” Zechner said.

Aurora finished 2020 down a full 68 per cent, while so far in 2021 the stock is up 32 per cent. That compares to the Horizons Marijuana Life Sciences ETF , which tracks the sector as a whole and was down ten per cent last year and is up 51 per cent for 2021.

Last week, Aurora announced the close of another financing round, this one for US$138 million through the sale of 13.2 million units comprised of one common share and one-half of a warrant exercisable over the following 36 months. The company said it would use the proceeds for general corporate purposes including reducing its debt load. The financing comes after a separate public offering this past November for US$172.5 million.

Ahead of Aurora’s second quarter fiscal 2021 financials due next week, the company last reported earnings in November where the company posted fiscal Q1 net revenue of $67.8 million compared to $75.2 million a year earlier and $67.5 million for the previous quarter. The company’s Q1 net loss was $107.2 million compared to a loss of $1.8 billion for the previous quarter. Analysts had been expecting net revenue of $63.6 million. (All figures in Canadian dollars except where noted otherwise.)

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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