The cannabis industry is riding high after a truly remarkable 2018. Even though pot stocks had a less-than-memorable year, with 10 marijuana stocks losing at least half of their value, the weed industry gained legitimacy like never before following the legalization of recreational marijuana in Canada. Once considered a taboo topic, legal marijuana is very much here to stay. That means investors who pick the right marijuana stocks stand to make a pretty penny.
Then again, investors also understand that not every pot stock will be successful. Ambitions are high in the early going for every direct and indirect player, but history suggests that all major growth trends will have losers. Perhaps no company is teetering on the edge of greatness or disaster more than Aurora Cannabis (NYSE:ACB)…
What would it take for Aurora Cannabis to become a buy?
Aurora Cannabis is currently projected to lead all Canadian growers in peak annual output, with the company conservatively calling for “at least 500,000 kilograms” in annual yield. However, following its purchase of ICC Labs in South America, which had 92,000 square feet of operational growing capacity and north of 1.1 million square feet of under-construction capacity, 700,000 kilograms of peak annual output is more likely, in my view.
If production capacity was the end-all for marijuana companies, Aurora Cannabis would undoubtedly be a stock for investors to buy. Unfortunately, numerous other factors come into play — e.g., share-based dilution and a lack of operating profits — beyond just production that have led yours truly to regularly proclaim Aurora a stock to avoid.
But I’m not averse to changing my opinion on Aurora Cannabis. Here are four factors that would encourage me to become bullish on what’s possibly the most polarizing pot stock of all.
1. A serious decline in share-based dilution
My biggest issue with Aurora Cannabis has been its complete disregard for its shareholders.
Since pot stocks have had virtually no access to nondilutive financing options from banks, they’ve regularly turned to bought-deal offerings to raise capital. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants in order to raise money. While successful in doing so, bought-deal offerings can immediately (through common stock offerings) and over time (via convertible notes, options, and warrants) balloon a publicly traded stock’s outstanding share count. This winds up weighing on existing shareholders and pushing down the earnings per share of profitable companies.
Since the end of fiscal 2014 (Aurora’s fiscal year ends on June 30), the company’s outstanding share count has skyrocketed from 16 million to nearly 962 million. Once its latest purchases of ICC Labs, Whistler Medical Marijuana, and Farmacias Magistrales are factored in, along with any exercised notes, options, or warrants outstanding, the company could easily have 1.1 billion shares outstanding.
This growth-at-any-cost strategy has been a disaster for long-term Aurora Cannabis shareholders. What I’d like to see is the company take a step back from its aggressive capital-raising strategy and work with the puzzle pieces it’s already assembled. At this point, share-based dilution of less than…
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