- Aurora Cannabis Inc. reported earnings on September 11 — now shares are down 20%.
- Cannabis is legal in Canada, but there aren’t many places you can buy it.
- In our exclusive Marijuana Millionaires special report, we’ve avoided Aurora because of its red flags.
One of the biggest names in the Canadian cannabis market reported earnings last Wednesday.
Shares fell 20% on the news. Investors don’t know what to do right now: Buy the dip or dump the stock?
Today, I’m breaking down what the report means for every cannabis investor.
For a full comparison of Aurora’s and Canopy’s stocks, watch my better buy video!
I will also share two ways you can play this growing sector.
Enough Pot for All of Canada
Aurora Cannabis Inc. is the second-largest Canadian producer.
Last quarter, it produced 29,000 kilograms (almost 64,000 pounds) of cannabis. Management expects to reach the full growing capacity of 625,000 kilograms (nearly 1.38 million pounds) by 2021.
Let’s put that into perspective.
The average Canadian smokes 21.1 grams of pot per year. That means Aurora will grow enough to supply 29 million people. That’s almost the entire population!
That’s an impressive figure. But volume alone isn’t going to win over the market.
Cannabis Sales Slow Down
The Canadian market is experiencing serious bottlenecks.
Dispensaries — where you can go to buy legal cannabis products — need licenses. And the rollout of those licenses has been slow.
That put a lid on sales.
Ontario is home to about 15 million people. Its first dispensary didn’t open until six months after Canada legalized marijuana.
Even then, only 15 shops opened. But the province is allowing another 50 stores to open this year.
The tight regulations on shops hurts sales. Aurora pointed to this bottleneck as a reason for missing its guidance:
However, the Canadian consumer channel continues to experience challenges at the retail level in key markets and resolution of this issue is beyond the Company’s control.
Don’t buy this excuse.
Management released its revised guidance in August. That was far enough along in the quarter. Aurora should’ve realized the lack of stores was capping sales.
The Canadian company put out its optimistic guidance following competitor Aphria Inc.’s stellar earnings report in August. Aphria’s shares rallied 40% that day.
Aurora saw that investors were rewarding profitability. It overpromised to cash in.
That’s not the only thing Aurora is overpromising. It’s been hinting at adding a strategic partner since Canopy Growth Corp. partnered with Constellation Brands Inc.
Canopy is Aurora’s biggest competitor. And Constellation Brands is a powerhouse in the alcohol space. It owns popular brands such as Corona and Svedka. Its shares have more than doubled over the past five years.
Aurora is entering a difficult stage.
The Canadian market is not opening up as quickly as it hoped. And it hasn’t made enough international investments to see strong growth.
Its cash balance dropped 40% to $180 million this quarter. Last week, Aurora sold its stake in cannabis company The Green Organic Dutchman at a 15% discount. The move raised $64 million for Aurora.
But at this rate, Aurora will need to raise cash within the next few months.
And that means more dilution for shareholders. Think of it like a pie: If a company wants to create new shares, it has to cut the existing pie pieces into smaller ones. That means everyone’s shares are worth less.
2 Ways to Play the Marijuana Sector
Despite Aurora’s struggle, the cannabis market is growing fast.
Here are two ways you can play this industry:
- Join Real Wealth Strategist to better navigate this sector. Our readers get exclusive insight into the cannabis industry.
- And for a broader approach to the sector, consider an exchange-traded fund (ETF). The Cambria Cannabis ETF (BATS: TOKE)is one of the newest cannabis ETFs to hit the market. Compared to other ETFs, TOKE’s expense ratio is the lowest at just 0.42%.
Now, the ETF will give you exposure to major companies in the cannabis industry. Aurora Cannabis Inc., MediPharm Labs Corp. and Aphria Inc. are some of its top holdings.
Aurora makes up 7% of this ETF — smaller than its makeup in other sector ETFs. Aurora’s large position makes it impossible to avoid in a global cannabis ETF.
You’ll notice that it trades on a different exchange. For our purposes, trading a stock listed on the BATS is the same as the New York Stock Exchange.
In the Real Wealth Strategist newsletter, we’ve avoided Aurora Cannabis. Its track record of diluting shares is a red flag for us.
Every new reader gets access to our exclusive Marijuana Millionaires special report. It features our top picks in the industry.
Click here to learn more about what companies to buy and which ones to avoid.
Internal Analyst, Banyan Hill Publishing
P.S. I want to share one of my interviews from last week’s Total Wealth Symposium. I sat down with former hedge fund manager and fellow Banyan Hill expert Charles Mizrahi. We discussed our views on the cannabis industry and how we approach the market.