Why You Should Sell Aurora Cannabis Stock Before It Reaches New Highs

Aurora Cannabis (NYSE:ACB) almost appears unstoppable. As a result, ACB stock has achieved highs not seen since before marijuana gained official legal status in Canada. Hemp legalization in the United States and the market’s move higher have lifted both Aurora Cannabis and the stock of its peers.

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However, this move higher has occurred despite Aurora making no moves into the U.S. hemp market. Moreover, ACB stock trades close to levels it saw before it started falling in October, portending a possible double top in the equity.

Considering the stock price and other factors, investors should probably avoid Aurora Cannabis stock at these levels.

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A Rising Market, U.S. Hemp Has Reignited Cannabis Stocks

Investors can find a lot to like about ACB stock. The company reported revenue growth of 387% in its last quarterly report. Moreover, its investments place it on track to become the largest producer in the industry by next year.

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This may help explain why ACB stock has more than doubled from the $4.58 per share low the equity reached on Dec. 24. The overall market began a recovery at that time. Still, the U.S. government also signed a farm bill into law that granted legal status to hemp. Thus, Aurora and its peers not only gained access to the U.S. market, but they also benefit from a reignited boom in marijuana stocks.

However, this boom is occurring south of the Canadian border in a country with nearly ten times the population. Moreover, reticence about cannabis remains in some parts of the U.S. Interestingly, this may help cannabis stocks as it will delay a potential “sell the news” event comparable to the stock swoon marijuana stocks saw following Canadian legalization.

Now trading at just under $10 per share, it is now approaching the $12.52 per share high it achieved right before marijuana achieved full legal status across Canada.

The Current ACB Stock Price Should Cause Concern

Valuation offers little help when evaluating ACB stock. ACB trades at more than 80 times sales, and full-year profitability will not come until at least next year. However, that comes in lower than its largest peers: Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY) and Cronos Group (NASDAQ:CRON).

However, ACB looks cheap only on a comparative basis. Also, high valuations could still influence ACB stock indirectly. So far, the stock has only traded above the $10 per share level for two weeks of its history. As the stock approaches its record high, investors could start to question the valuation. If I were to buy ACB, I would also want to know that the $12.52 level of last October is not a double top.

Also, ACB’s expansion outside of Canada appears perplexing. The company reported revenues of C$2.9 million ($2.17 million) outside of Canada. It has also expanded into 24 countries across five continents. However, even though it legally can, it has so far chosen not to follow its peers into the U.S. hemp market.

Moreover, ACB has relied heavily on stock dilution to fund its expansion. With the company reporting losses and the stock trading at over 80 times sales, I can hardly blame the company for issuing stock to support its expansion. However, it reduces the incentive to pay high multiples.

The Bottom Line on Aurora Cannabis Stock

Amid the recent rally, investors should probably avoid ACB stock at its current levels. Despite my view on ACB stock, Aurora continues to improve its market position. As a result of expansions, it may lead the industry in production by next year. Also, between massive revenue increases and the growth potential of the world cannabis market, one can understand why Aurora Cannabis stock trades at a premium.

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However, ACB has spent very little of its history trading at or above current levels. To achieve significant growth, traders need to know that the equity is not forming a double top. Moreover, stock dilution has funded much of the company’s expansion. This has likely hampered growth in ACB stock. Furthermore, it seems strange that Aurora Cannabis has not followed its peers into the U.S. hemp market. I expect the company to enter the U.S. at some point. Still, the fact that it will lag its peers in such a large market should concern investors.