Does it Make Sense to Buy-Low on Cannabis Stocks Right Now?

Aurora Cannabis Inc. (TSX:ACB) and other cannabis stocks were battered in the midst of broader volatility in the Canadian stock market this week.

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Some of the largest cannabis stocks were dealt another blow as trading opened for the week on August 7. The diplomatic crisis between Canada and Saudi Arabia appeared to boil over into the stock market, as the TSX experienced a significant international sell-off. In previous sell-offs, cannabis stocks have proven to be some of the most volatile holds.

Aurora Cannabis (TSX:ACB) stock briefly fell below the $6 mark during the August 7 trading day. This was the first time Aurora had fallen below the $6 mark since November 2017. Aurora has remained one of the most shorted stocks on the TSX since its tremendous surge in the last months of 2017 and early 2018.

Back in July, I’d discussed whether or not investors should dive into Aurora after it had dipped below the $8 mark. Although Aurora was likely to be subject to volatility in the period leading up to recreational legalization, I’d concluded that it was still a solid long-term buy and hold.

On August 8, Aurora also announced a licence agreement that will give Alcanna exclusive rights to open retail cannabis stores under the Aurora name across Canada. Alcanna has a significant footprint in Western Canada, and rumours persist that the company is eyeing Ontario after Doug Ford’s PC party announced cannabis sales would go private in the province. Early this month, I’d covered Alcanna and explored why it could be an attractive target, as the competition for retail spots heats up in the country’s most populous province.

Aphria (TSX:APH) tumbled below the $10 mark on August 7 before rebounding when trading opened the next day. The company released its fiscal 2018 fourth-quarter and full-year results on August 1. Revenue climbed 17% from the prior quarter to $12 million. For the fiscal 2018 full year, Aphria saw revenues rise to $36.9 million compared to $20.4 million in the previous fiscal year.

As has been the case in previous quarters, the best news was to be found in Aphria’s ability to reduce its production costs. Costs to produce dried cannabis per gram fell to $0.95. This was the second straight quarter that Aphria achieved production costs below $1.00.

Aphria inspired some skepticism following the release of its fourth-quarter and full-year report. CEO Vic Neufeld admitted that the company faces “challenges” ahead of the recreational cannabis roll out, but this should come as no surprise for investors who have been following this fledgling industry closely. The company’s overseas expansion has also not been without complications, as Aphria International reported negative $2.8 million in EBITDA.

Canopy Growth (TSX:WEED)(NYSE:CGC) actually saw its stock rise on August 7, once again illustrating why Canopy remains the safest bet of the Big Three producers. Canopy has emerged as a leader, as it has raced to stock up inventory ahead of what is expected to be overwhelming demand come the roll-out in October.

Are cannabis stocks a buy right now?

The top three producers all pose risks that investors should be acquainted with ahead of what could be a chaotic roll-out. Looking long, however, the Big Three should be a reliable bet to consolidate in the months and years ahead and take advantage of an industry that could surpass alcohol sales in total revenue by the beginning of the next decade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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