Aurora Cannabis Inc (TSX:ACB) (OTCQB:ACBFF) (FRA:21P) is fast approaching price levels too irresistible to ignore. The company with the world’s largest medical cannabis portfolio is in full-blown capitulation mode, with selling that can only be described as ‘indiscriminate’. Under those auspices, the company is entering territory which is sure to entice contrarian investors and forward-looking funds alike.
As a quick primer, the lasting relative under-performance is undoubtedly due to Aurora Cannabis’ purchase of MedReleaf Corp. on May 15th. But not right away: up until a few days before the closing date, Aurora had actually been keeping up with the Tier-1 cannabis sector at-large. In fact, it was vastly out-performing some peers from the period when the deal was announced, returning just a couple of percentage points less than Canopy Growth Corp. The veneer of normalcy was steadfastly intact.
Right before the transaction closing date (July 25) took place—a transaction that would see around 375 million shares added to the public float, without any selling restrictions—the carnage intensified. With this latest price action carnage—down ↓9.80% today and ↓14.54% over the past three sessions—ACB shares are down a whopping ↓48.99% since the June 21st close. Just as shockingly, over the past 36 sessions, ACB has finished down in 28 of them; and 4 of the 8 positive closes were by a margin of $0.07 or less. The price action has rarely been uglier.
Aurora Cannabis CCO Cam Battley lists the catalysts that will drive value into ACB’s share price going forward, and how shareholders will receive free Australis shares upon that company’s launch – anticipated in August
Needless to say, the market’s overall fragile condition could not absorb such a load. With the cannabis sector entering bear market territory two days prior to the transaction closing (>20% price decline from the June 21-July 24 closing high, as determine by HMMJ), the bid broke down in insufferable retreat.
Aside from the obvious selling pressure share dilution heaped on the stock, the pummeling is largely a byproduct of inopportune timing. But fast-deflating valuation in the absence of worsening fundamentals may be setting the stage for sentiment change, if our estimations are correct.
A Major Technical and Psychological Inflection Point Awaits
In the world of equities, $5.00/share is a big deal. It’s often the Maginot Line between what funds are allowed to buy, and what they are required to sell. If a given stock’s VWAP (volume weighted average price) is below the $5.00/level for “X” amount of time—depending on the individual charter—the requisite fund may be required to cut bait. This threshold is only one such factor determining ownership eligibility, but it’s an important one.
With Aurora Cannabis finishing the day at $5.34/share (↓9.80%), this level looks to be coming into play sooner rather than later.
Could Aurora Cannabis materially fall through $5.00/share with 2018 volume clusters generally on the downswing? At these deeply oversold levels? I have strong doubts unless ACB’s volume profile increases to February levels.
Keep in mind that Aurora Cannabis fund ownership has been growing steadily over the past few quarters. According to the latest data from Morningstar, Fund and Institutional holdings rose by ↑1.450 million and ↑1.464 million shares respectively, quarter over quarter. “Total Owners” saw a combined ↑330.77% and ↑166.67% QoQ jump as well, suggesting that additional players are coming around to staking positions. Combined, Institutions and Funds owned over 49 million shares, which equates to 7.52% of total non-diluted shares outstanding pre-merger.
Institutional Equity Ownership – ACB
|Vanguard Group Inc||11,882,089||1,845,316||2.10||0.02||30/06/2018|
|Westcap Mgt Ltd||8,683,272||-1,077,200||1.56||25.90||30/06/2018|
|Factor Advisors, LLC||5,665,646||-888,734||0.51||7.72||13/08/2018|
|BMO Asset Management Inc||867,867||5,947||0.09||0.16||31/07/2018|
|BlackRock Fund Advisors||919,204||0||0.08||0.03||13/08/2018|
|BlackRock Advisors (UK) Limited||858,715||0||0.08||0.02||13/08/2018|
|Charles Schwab Investment Management Inc||724,100||0||0.07||0.17||10/08/2018|
|Lord, Abbett & Co LLC||461,600||0||0.08||0.37||30/06/2018|
|Total: Top 10 institutions||36,102,233||1,155,334||5.41|
Fund Equity Ownership – ACB
|Golden Opportunities Fund Inc||7,616,618||-944,877||1.36||24.23||30/06/2018|
|GOF Innovation class i-shares||1,066,654||-132,323||0.19||51.09||30/06/2018|
|iShares Core S&P/TSX Capped Composite||1,518,272||1,918||0.14||0.22||13/08/2018|
|FINB BMO S&P/TSX composé plafonné||867,867||5,947||0.09||0.16||31/07/2018|
|Triasima act canadiennes toutes cap F||655,000||0||0.12||1.21||30/06/2018|
|Vanguard FTSE Canada All Cap ETF||368,594||66,764||0.07||0.23||30/06/2018|
|SSQ Triasima Canadian Equity GIF Stand||315,000||0||0.03||0.78||31/07/2018|
|RBC Private Canadian Mid Cap Eq Pl Sr F||268,000||62,700||0.05||0.99||30/04/2018|
|iShares S&P/TSX Completion||312,082||0||0.03||0.91||13/08/2018|
|SSGA S&P/TSX COMPOSITE INDEX||161,500||-3,900||0.03||0.21||30/06/2018|
|Total: Top 10 funds||13,149,587||-943,771||2.11|
Now, are we to believe that Institutions and Funds will simply throw in the towel now that the market is witnessing some moderate capitulation? At 2018 closing lows no less? Not only would I argue against that notion, I would posit that Big Money is salivating at the opportunity at putting sideline money to work.
It’s not as if Aurora’s business prospects or sector outlook has deteriorated. To the contrary, the MedReleaf deal has positioned the company as the preeminent medical supplier in Germany and Canada, where patient enrollments are seeing robust growth. The combined entity now enjoys the largest off-take distribution within the Canadian provinces, including the largest domestic pharmacy reach. Dilution aside, Aurora is ideally positioned to capitalize in several vertical markets on scale, productions costs, refined goods innovation… you name it.
Furthermore, we presume that much of the latent MedReleaf selling pressure has already taken place. Not only have around 172.3 million ACB shares traded hands since July 26th, the incentive to sell keeps abating with each lower closing low. While it’s unclear whether MedReleaf-inspired selling is situated on the western side of the hurricane, we’re confident a sizable portion of the 375 million unlocked shares weren’t destined for post-transaction liquidation anyway.
At the end of the day, we wonder if the extremely sector selloff, combined with a gradually declining MedReleaf selling pool (and dis-incentivization that comes with lower prices), plateauing downside volume and expected ironclad support around $5.00/share aren’t setting the stage for a large relief rally.
It’s hard to believe, but Aurora Cannabis has lost over fifty percent in peak-to-trough price over the past seven weeks. There’s really no sugar coating this type of under-performance, irrespective of circumstance or market condition. Aurora’s weak price action has rivaled even the most oversold pie-in-the-sky junior LPs during the winter bloodletting—even though the company has established and fortified itself as one of the preeminent cannabis companies in the world. The liberal use of shareholder capital does have consequences.
But through chaos eventually comes order. And if coming nexus of technical support/institutional purchasing/sentiment shift come together like I think it will, a rare gift from the equity heavens could await. It’s not often these no-brainer type of investments fall like manna from the sky.
Some will be impatient and scalp their fifty cent or dollar gains; some may wait awhile longer. But for those willing to let Aurora Cannabis sort out its expansive rec/medical portfolio, and execute a reverse stock split (catalyst) I believe is destined to happen, the future bounty could be so much more plentiful.
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