About a month ago, Canadian Prime Minister Trudeau announced that he intended on having cannabis be legal throughout the entire nation and hopes to have this accomplished by July. For established Canadian cannabis companies, this expansion could result in increased sales. Canadian Pot company Aurora Cannabis (OTC: ACBFF) has also just finished a conversion of indenture to stock that will save the company in costs. The result has given the company a significant rise in their stock price with further growth ahead.
Trudeau hopes to legalize across the nation
Prime Minister Trudeau hopes that the entire nation can have legal recreation and medical marijuana in Canada by July. While there are some that are concerned about the pace at which the federal government wants to proceed, there are already considerable laws in place with medical marijuana to help guide the federal government's standards.
The government hopes to achieve a C$1.00 tax per gram for recreational marijuana. This is considered a major win for producers as it is not too high (The amount works out to be about 10% on a purchase).
The indenture conversion at $3.02 per share converted debt into a little more than 2 million shares. The company has successfully achieved target levels that have pushed its stock upward over the past several months. This, in turn, has allowed the company to convert the last of its debt into shares. The news from today's move pushed the stock to all-time highs:
Aurora Cannabis is sitting on cash
The market capitalization of Aurora Cannabis is just over $1 billion; it is one of the larger pot stocks. At the same time, the company is overflowing with cash; in their last (As of June, 2017, the company had $122 million cash on hand).
Cash is king in the industry. Because banks are insured by Federal Depository Insurance Corp. (FDIC), banks cannot do business with cannabis proprietors. Therefore, these companies find workarounds, Bitcoin being one of them. Giving stock for large cash transactions is another method of dealing with the cash-only nature of the industry. But, I feel it is a matter of time before the banks open up properly to these companies in the industry.
But, I need to caution on the cash situation from Aurora. First, and I address this in the next section below, I am not in entirely in love with the revenue the company has. Aurora does have cash. But, that cash mainly came from financing and selling of stock, not from sales of products. Sales are increasing. But, so have costs of sales. The company will need to turn around that trend.
Aurora Cannabis Financials
Here is the growth story that grabs me for this company (and other pot stocks). In June 2016, revenue for Aurora Cannabis was sitting at $1 million. One year later, June 2017, revenue increased to $13 million. But, net profits dropped in the same year-over-year period from $4.4 million net loss to $9 million net loss. While I loved the increase in the revenue, obviously I was hopeful that net profits would have improved. This reminds me of the old saying we learn in college while studying economics/statistics: A man is sitting in a chair with one foot in a bucket of boiling water and the other foot in a bucket of ice water; on average, he is comfortable.
While I am not entirely comfortable with the increase in revenue versus the increase in net income loss, the culprit was an increase in the cost of goods sold. As a company increases and expands, this is normal. Aurora took on additional costs during this period. From here, profitability should increase as long as there is an in-kind increase in revenue. "Should": I hate using that word. But, this is a growth stock in an emerging industry.
For my own portfolio
I had been scouring stocks to pick up over the past several months and will continue to do so. I am looking to add in some long-term holdings. I am compiling a list of "pot stocks" to focus on. My interest in pot stocks is that the industry is fairly new and these companies have a lot of potential to grow, no pun intended. Further, the industry continues to expand as more and more states in the United States allow either Medical Marijuana and recreational (Nevada just legalized recreational, bringing the total states to 8, Colorado, California, Washington, Oregon, Alaska, Nevada. Maine and Massachusetts). I see more states moving to this and companies that are positioned well can take advantage of the growth potential.
I did not see the moves today and have been eying up the stock over the past couple of weeks with a wait-and-see move. Now, I may have to get creating getting into the company. Long term, over the course of 15 years, I expect the company to do very well and so am not too concerned with how fast I get in. I want to get in at a price that makes sense. I will keep posting on my efforts to get into the stock.
Also, I have about 150 other pot stocks that I am putting together as a list. I want to look at true pot stocks, meaning, MiracleGro would not make my list. The company is a $5 billion company. While their product is used by the industry, if the industry went away, MiracleGro would still be a $5 billion company. I want true stocks in this list.
I want true stocks in this list, companies that either directly provides products or mostly supply to the companies that directly provide products to the industry. I plan on putting together an extensive analysis on these stocks and will invest accordingly.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ACBFF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.