Aurora Cannabis (NYSE:ACB) attracts more interest than any other marijuana stock on the market right now. The stock’s average trading volume stands well above all of its Canadian peers. But this high level of interest doesn’t necessarily translate to positive views about Aurora.
It’s understandable that many investors might have soured on Aurora Cannabis, with its shares plunging more than 60% from its high of earlier this year. However, there could now be a signal that it’s time to buy Aurora stock.
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Analyzing the analysts
What’s this potential sign that means Aurora is a buy? Changes in analysts’ opinions on the marijuana stock. But it’s not what you might think. Aurora could be a stock to buy right now because analysts have lowered their views rather than raised them.
On Sept. 16, Stifel Nicolaus analyst Andrew Carter downgraded Aurora stock to a sell rating and slashed his one-year price target by more than 30%. Earlier this month, Jefferies analyst Owen Bennett cut his price target for Aurora in half earlier this month.
You might think selling Aurora stock, or at minimum staying away from it, would make sense with such negativity among analysts. However, the past performance of analysts indicates otherwise.
For example, Canaccord Genuity boosted its price target for Aurora by 18% on Sept. 26, 2018. The stock peaked roughly two weeks later and then went on to lose nearly half of its market cap by the end of the year. On the other hand, Eight Capital reduced its price target for Aurora by nearly 12% on Jan. 9. Aurora’s share price promptly soared more than 80% over the next couple of months.
These aren’t isolated examples. In March, Cowen reiterated its outperform rating on Aurora. A month later, Bank of America reiterated its buy recommendation for the stock. And, of course, Aurora’s share price tanked in subsequent months.
Behind the dismal track records
Why do analysts seem to have such dismal track records with Aurora Cannabis? I think it’s mainly because they’re reactionary and only looking at the short term.
As a case in point, Bank of America analyst Christopher Carey downgraded Aurora stock in June to a neutral rating only three months after initiating coverage on the stock with a buy recommendation. His main reason for changing his tune was that the company was burning through its cash. But Aurora was burning through its cash when Carey called the stock a buy, too.
This might seem absurd — and it is. However, analysts nearly always bounce back and forth on their views of stocks like a kid on a pogo stick. They tend to become negative after negative news is known and become positive after positive developments occur.
The problem is that there’s a thing called reversion to the mean. When a stock goes down, there’s a pretty good chance that it will soon thereafter bounce back. The opposite also is often true: In many cases, a stock that goes up a lot gives up a big chunk of its gains. Analysts make their calls as if the current direction of a stock is set in stone. It usually isn’t.
A surefire sign to buy?
So does the fact that analysts are down on Aurora serve as a surefire sign that it’s time to buy the stock? Nope, at least not the surefire part.
For one thing, there’s no guarantee that history will repeat itself. Just because Aurora’s share price has frequently moved up when analysts were negative and down when they were positive in the past doesn’t mean that it will continue to do so.
More importantly, basing your investment decisions solely on what someone else says without doing your own homework is never a good idea. That’s true even if you’re attempting to execute a contrarian investing strategy.
Investing in marijuana stocks isn’t really any different from investing in any other kind of stock. Evaluate the company’s long-term prospects, its risks, and its management team. Maybe you’ll decide that Aurora has all those things going in its favor. Maybe you won’t.
But your opinion about Aurora is what matters, not what any analyst thinks. The only surefire sign to buy the stock is that you’re willing to put your own money at risk, expecting to reap rewards from doing so over the long run.