In the last two quarters, billionaire, hedge fund manager, and mathematical genius Jim Simons has moved decisively into the cannabis sector, taking large positions in both Aurora Cannabis (ACB) and Aphria (APHA).
Simons, known for his work in higher mathematics and military cryptography, founded the Renaissance Technologies hedge fund in 1982. The firm was a pioneer in quantitative trading, the application of higher mathematics to the financial markets, and has developed a reputation as one of the best returning hedge funds in the business. Simons retired from active direction of the company in 2009, but continues as non-executive chairman in an advisory role.
Simons’ new positions in cannabis are considerable. Per the 13F filings, his firm purchased 788,595 shares of ACB, for $6.3 million, in Q1, and followed up in Q2 with an additional 905,305 shares at $7.1 million. Also in Q2, Simons picked up 241,500 shares of Aphria, at $1.7 million. Clearly, Simons sees something of value in the cannabis sector.
Even the Skeptics See Potential in Aurora Cannabis
Writing earlier this month, 4-star analyst Rommel Dionisio of Compass Point noted Aurora’s (ACB) high quarterly production and strong brand presence in the Canadian marijuana market. Aurora reported nearly 30,000 kilos of cannabis production in the last quarter, significantly more than the previous guidance of 25,000, and making Aurora one of the world’s largest medical/recreational cannabis producers.
Dionisio hedges his bets on Aurora. He rates ACB as a Hold, but gives the stock a $8 price target, indicating a 33.5% upside from the current share price of $5.99. The analyst sees plenty of growth potential in Aurora’s strong production and hefty market share – all factors that brought Renaissance Technologies into this stock, as well. (To watch Dionisio's track record, click here)
On the negative side of the ledger, Aurora lowered guidance of fiscal Q4 revenue, from $111 million to the range of $100 to $107 million. The reduction in revenue guidance comes even as the company is ramping up production, and Dionisio attributes it to “modest pricing pressure” as supplies increase in the Canadian market.
Summing up Aurora’s situation, Dionisio says, “Aurora enjoys the second leading share of the important Canadian market, with approximately 20% market share in both the recreational and medical use markets. Moreover, through a series of acquisitions and license wins, Aurora has become one of the global front-runners in establishing an early presence in several countries in Europe and Latin America. Aurora … appears well positioned to remain one of the leading companies in the global cannabis industry, and as such warrants a premium valuation…”
Overall, ACB gets a Moderate Buy rating from the analyst consensus, based on 3 buys and 4 holds given in the past three months. As mentioned, shares are selling for $5.99, so the $8.68 average price target suggests an upside of 45%. It’s important to note here that even the low-end price target, of $7, still suggests an upside of 16%, so even the true skeptics see some potential in the stock. (See ACB's price targets and analyst ratings on TipRanks)
APHA Presents a Buying Case
With a 967% increase in net sales recorded in Q2 2019, compared to the year-ago quarter, Aphria (APHA) presents on the surface with a much more clear-cut case for buying. Unlike many cannabis companies, which are still bleeding red ink as they work to pay for recent acquisitions and expansions, Aphria brought in a net profit of C$15.8 million.
There is a possible shadow here. Of Aphria’s total revenue, C$128 million, C$99.2 million came from “distribution revenue” credited to its acquisition earlier this year of CC Pharma, the German medical cannabis company. Aphria’s own recreational sales increased 158% since last year, but still only totaled C$18.5 million. If Aphria should have to write down the CC Pharma acquisition costs, it may still show a profit – but that is not guaranteed.
Despite the questions lingering around Aphria’s Q2 profits, analyst Justin Keywood, from GMP FirstEnergy, puts a Buy rating on APHA shares. In line with his bullish rating, Keywood gives APHA a C$14 price target – or $10.55 in US currency. His target implies an impressive upside of 70% from the stock’s current sales price on the NYSE. (To watch Keywood's track record, click here)
Keywood sees the company’s combination of rapidly expanding production, high-quality product, and solid relations with government contacts (important for medical cannabis distribution in Canada’s nationalized health system) forming a solid foundation for both current operations and future growth.
Keywood says, “Aphria is executing on a plan to significantly improve how it operates, while expanding rapidly. This is supported by our conversations with experts in the industry. Aphria also has $571mm in cash to support growth initiatives, while investing in derivative products, international operations and other strategic areas.”
The Street largely seems to echo Keywood’s positive sentiment, considering TipRanks analytics showcase APHA as a Moderate Buy. Out of 7 analysts polled in the last 3 months, four are bullish on Aphria stock, while two remain sidelined, and one is bearish. The stock’s average price target of $10.57 represents about 70% upside potential. Like ACB, APHA’s lowest price target is significantly higher than the current share price, indicating an underlying confidence in the company, even among the naysayers. (See APHA's price targets and analyst ratings on TipRanks)