The cannabis trade dried up after the bubble burst months after weed became legal across the nation nearly two years ago. The massive sell-the-news scenario should have come as no surprise to Foolish readers, as I warned investors to take their profits on frothy marijuana stocks before they had a chance to be surrendered to the hands of Mr. Market.
With the heat picking up in the cannabis scene again thanks in part to Joe Biden’s presidential victory, shares of Aurora Cannabis (TSX:ACB)(NYSE:ACB) have been a smoking hot commodity once again, with shares trading hands at a fast and furious rate. Aurora Cannabis stock skyrocketed a staggering 56% last Friday, bringing the name up over 150% from its pre-election October depths.
Earlier this year, when pot stocks were viewed as “dead money” by speculators who’ve moved onto sexier investments such as electric vehicle plays, I urged longer-term value investors with strong stomachs to back up the truck.
“Everybody is bearish on Aurora right now, but that’s precisely why I think you should be bullish. The company has made mistakes, but it’s paid the price, and then some. What many analysts neglect is Aurora’s margin advantage over many of its peers in the space. It’s this advantage that will allow the company to thrive when the tides have the opportunity to turn again,” I wrote in a prior piece urging investors to take the role of a contrarian on the name.
“In the meantime, it’s going to be a race to the bottom, as LPs [(licensed producers)] look to combat the black market. There will be blood on the Streets, but I think Aurora will survive, and those with the patience to hold through the next five years, I believe, could see significant rewards now that the stock has overswung to the downside.”
Newfound momentum, but the dirt-cheap valuation remains
Aurora’s latest bounce is nothing short of unprecedented. Despite more than doubling over the span of a few trading sessions, the stock remains a country mile below its all-time highs. At the time of writing, Aurora stock is still over 92% from its all-time high. As heat returns to the out-of-favour cannabis space, ACB shares could be headed much higher. The odds of big changes to U.S. cannabis law could reignite the euphoria on the space after its multi-year period of hibernation.
While I wouldn’t speculate on the name over the near-term with the intention of making a quick buck, I would look to scale into a position gradually over time, as Aurora stock could easily double or triple up again during the Biden era. That said, there will be major bumps in the road, so investors should prepare their stomachs for what will be a continued rollercoaster ride of a stock.
With shares trading at a ridiculous 0.3 times book value, I’d put Aurora Cannabis stock into the speculative must-buy category for younger investors willing to hold for at least the next four years. The post-legalization demand for cannabis may have been a hallucination, but the longer-term fundamentals, I believe, are well worth the depressed price of admission here.
In the meantime, Aurora could fluctuate wildly en route to the $30, implying just north of 100% in upside from today’s levels. I’d initiate a half position now and half a position after a meaningful pullback once the Biden bounce cools off.
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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 Joey Frenette has no position in any of the stocks mentioned.