As the broader markets retreat, the probability of further steeper declines has been raised, but unlike your average non-cannabis stock, it appears that some of the more attractive pot players may have a lifeline that could potentially enrich the brave investors who are willing to take a contrarian position at a time when there’s a high degree of systematic and unsystematic risk at play.
Yes, the stakes have been raised, and cannabis stocks, including Aurora Cannabis (TSX:ACB)(NYSE:ACB), could have further downside, but on the flip side, businesses still need to be run with the long-term in mind. For firms operating within industries that could be negatively impacted from legal cannabis, the recent market pullback has to be seen as an opportunity to place a now “cheaper” bet in a cannabis company as a long-term hedge.
We’ve witnessed many cannabis players land dance partners over the last few months, and given the recent pullback in stocks across the board, it’s no mystery as to why there’s been a sudden interest from established behemoths in pairing up with a pot producer.
Sooner or later, all the “good” cannabis dance partners will be taken. And when it comes time to tango, firms operating within potentially disrupted industries aren’t going to want to be the odd man out.
Of all the cannabis companies out there, Aurora stands out as a company that’s ripe for a massive investment by a big pharmaceutical company. With MedReleaf and CanniMed Therapeutics in the roster, Aurora is a premier, albeit expensive, player in the medical cannabis market.
Recreational cannabis and medical cannabis are two completely different ball games, so it’s fitting that sin companies (alcohol and tobacco) have gone after recreational cannabis producers. What we haven’t seen yet is a massive investment from a pharmaceutical company, for which there are many potential bidders. A cannabis supply partnership may be more prudent, but should the broader basket of pot stocks continue sinking into the abyss alongside a recession, don’t be surprised to see a potential Aurora investment happen when you least expect it.
At the time of writing, Aurora is down 42% from the top. I expect the negative momentum to continue into 2019, and while I’d never recommended a company based solely on a takeover basis, I’d argue that if you’re in the market for a cannabis stock in a broader bear market, you might as well go for the next best cannabis player that lacks a big investor, as it could have the most near-term upside.
Be warned, however; Aurora could fall to $2 and change before a big-league investor jumps in. So, don’t expect a margin of safety with the name.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.