Looking to Make a Profit from Pot Stocks? Read This
By now you’ve probably realized just how volatile marijuana stocks can be. For a pot stock to make a double-digit surge, it doesn’t necessarily need a major cheerful announcement; sometimes a change in sentiment is enough. On the other hand, a weed stock also doesn’t always require serious bad news to take a tumble; sometimes short interest just miraculously builds up.
Still, given what has been going on lately, I’d say there’s a good chance for Aurora Cannabis Inc (NYSE:ACB) stock to soar in the not-so-distant future.
Headquartered in Edmonton, Alberta, Canada, Aurora is a vertically integrated and horizontally diversified marijuana producer with 15 production facilities. It is one of the few pot stocks listed on both the Toronto Stock Exchange and the New York Stock Exchange, making it very convenient for investors in both the U.S. and Canada to own shares.
As is the case with most pot stocks, the main reason for investors to consider Aurora is the company’s growth potential.
According to its latest investor presentation, Aurora had an annualized production capacity of around 150,000 kilograms (330,693 pounds) of cannabis in early 2019. In 2020, that number is expected to increase by more than 300% to over 625,000 kilograms (1,377,889 pounds). (Source: “Investor Presentation July 2019,” Aurora Cannabis Inc, last accessed July 12, 2019.)
Aurora Cannabis Inc Annualized Production Capacity (Kilograms)
In fact, growth is already well underway at this marijuana producer. In the three-month period ended March 31, 2019, Aurora produced 15,590 kilograms (34,370 pounds) of cannabis, representing a 99% increase sequentially and a staggering 1,200% increase year-over-year. (Source: “Aurora Cannabis Announces Financial Results for the Third Quarter of Fiscal 2019,” Cision, May 14, 2019.)
Notably, the growth in Aurora’s marijuana production was accelerating through the quarter, as the company harvested most of the volume in the second half of the three-month period.
Needless to say, these kinds of growth rates boosted the company’s top line tremendously.
In the March quarter, Aurora Cannabis Inc generated CA$65.1 million in net revenue, up 20% from the prior quarter and up 305% from the year-ago period.
There was solid sales growth across all key markets for the company. The company’s net revenue increased 37% in the Canadian recreational pot market, eight percent in the Canadian medical marijuana market, and 40% in the international medical marijuana market.
At the same time, the company managed to produce marijuana at a lower cost. In the March quarter, Aurora’s cash cost to produce one gram of dried cannabis was CA$1.42, marking a 26% decline from a cash cost of CA$1.92 per gram in the December quarter.
Lowering the cost of production has helped improve the pot stock’s financial profile.
In the December quarter, Aurora Cannabis incurred an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss of CA$45.5 million. In the March quarter, the company’s adjusted EBITDA loss narrowed by 20% to CA$36.6 million.
In other words, the growth thesis for Aurora Cannabis stock looks rather intact.
Aurora Cannabis Inc (NYSE:ACB) Stock Chart
Now, let’s take a look at Aurora’s stock price performance.
Chart courtesy of StockCharts.com
Aurora Cannabis stock is up 44.8% year-to-date, which is quite an impressive performance compared to the broader stock market. However, the stock made those gains primarily within the first three months of this year, and it is actually down more than 27% since its high in mid-March.
Sure, as I mentioned earlier, big swings seem to be the norm for pot stocks these days. But what’s interesting about ACB stock’s movement recently is that it appears to have entered oversold territory.
In particular, I’m looking at the relative strength index (RSI). It is based on the closing prices of a recent trading period and compares the magnitude of recent gains to recent losses in order to measure the momentum in a stock.
The index ranges from zero to 100. A stock is considered to be overbought once the RSI approaches 70 and oversold if the RSI approaches 30.
As you can see from the chart, the 14-day RSI of Aurora Cannabis stock has fallen to 35.86, indicating that it is entering oversold territory. Given the fast-growing nature of the company’s business, the oversold condition of its stock means we could see a trend reversal going forward.
And there’s more: ACB stock has attracted a lot of short sellers. The last time I checked Yahoo! Finance, there were 85.9 million shares being shorted. (Source: “Aurora Cannabis Inc. (ACB),” Yahoo! Finance, last accessed July 12, 2019.)
Meanwhile, the average daily volume in Aurora Cannabis stock was just 13.2 million shares over the past three months.
Using the simple formula of dividing the current short interest by the average daily share volume, we see that the days to cover for the stock is 6.5. That is, at the average trading volume, it would take short sellers more than six-and-a-half days to cover their positions.
Eventually, short sellers would need to cover their positions. And the longer the period to cover, the more difficult it is for them to do that. With strong potential buying pressure from these short sellers, any sign of a rally in Aurora Cannabis stock could trigger a short squeeze.
Add it all up and you’ll see that Aurora Cannabis Inc is an oversold stock with extremely strong growth potential. Going forward, the company will likely deliver further signs of strength, such as a strong earnings report and an optimistic guidance.
Given investors’ bullish sentiment toward the cannabis industry, good news from Aurora will likely translate to upward momentum in ACB stock, which would in turn lead to short sellers rushing to cover their positions.
And given the current days to cover at Aurora Cannabis stock, the potential short squeeze could be a strong one. That’s why, despite already being one of the most well-known pot stocks, ACB could still see a lot more upside ahead.