Aurora Cannabis Inc (TSE:ACB) Faces Inevitable Collision at the 200-Day SMA
With the downturn in price action following Aurora Cannabis Inc (TSE:ACB) (OTCQB:ACBFF) (FRA:21P) friendly acquisition with MedReleaf Corp., the stage has been set. The stock is headed for a collision course not only with the simple 200-Day—still the sentiment barometer gold standard—but with large areas of support. The result should provide telling indication of near-term sector sentiment.
Since the Aurora-MedReleaf hookup was announced on May 14, the stock price has lagged. While it’s still early, a rather predictable result has occurred: some investors are choosing to deploy capital elsewhere at the moment. As of this writing, Aurora Cannabis is off $0.59 to $7.50/share (↓7.09%) since Monday, while tethered MedReleaf is now ↓2.89% in the red post-announcement. As a comparison, the Midas Letter Canadian Cannabis Composite Index (MLCCC) has edged ↑1.94% higher during that time.
This divergence isn’t alarming or abnormal; rather, it’s completely expected. The dampening effect on share prices following large dilutive acquisitions is well-known and telegraphed. If Aurora Cannabis’ management was focused solely on short-term stock performance, the deal would never have happened. These folks are thinking 3-5 years ahead, positioning themselves for the world stage as global markets come online. Long-term strategic maneuvering has won out—and it’s likely the right call.
With that said, no company wants to see their stock price tank either. Should Aurora weather the wet blanket adding 350 million-plus shares to its share structure entails, investors should consider it a success. That process is playing out right now, and will be coming to a head shortly.
That battle is set to take place at the 200-Day simple moving average. Even with all the new-age sentiment/quant indicators being deployed, the ‘200’ is still among the most followed sentiment indicators around. No company wants to be under it, because it’s difficult to attain any sustained upside momentum while under its shadow. There are exceptions, but not many.
In addition to the 200-Day MA, Aurora Cannabis has plenty of price support bolstering the voracity of the level. I count at least three key inflection areas Aurora can draw strength from as bears inevitably test long investors’ mettle.
From my standpoint, this upcoming battle has certain interesting subplots to it.
The first being the rather wide gap in relation to Aurora’s current share price versus MedReleaf purchase premium. That ratio currently stands in the double-digits, indicating skepticism among market participants that the deal will actually transpire. This, despite the hefty $80 million breakup fee, plus $15 million expense reimbursement fee (under defined conditions).
Cam Battley talks about MedReleaf acquisition rumors, recent earnings, corporate happenings and more
By all accounts, both sides want this deal to happen. However, if Aurora Cannabis shares fall precipitously, MedReleaf shareholders receive less return on its share capital. We can only speculate whether there’s some sort of “line in the sand” price MedReleaf is willing to accept.
Thus, if Aurora Cannabis can remain above key support on the chart, this should increase the already-probable odds (around 89% likelihood, based on current spreads) of the deal taking place. MedReleaf shareholders will still receive most of what they thought they were getting from the outset.
The second interesting subplot is cannabis market sentiment. Faltering share prices from the sector co-leader isn’t exactly a ringing call to action. I don’t think Aurora Cannabis has to necessarily lead the charge, given the mitigating circumstances here. But if they can hold key support, stabilize, and rally to a certain extent, this should give the market a nice tailwind. Broad sector rallies can only commence with leadership from the top.
Either way, Aurora Cannabis date with destiny at the ‘200’ is should be of interest to most cannabis investors. It stands as a key litmus test for the overall market, and the robustness of the Aurora-MedReleaf deal. Further weakness past support may also discourage other extraneous mergers from taking place, weighing on sentiment to a certain degree. A consolidating market is generally a strong one.
From where I sit, odds are Aurora Cannabis passes the test. There are too many willing investors with longer-term time horizons looking to snap up shares at lower levels. In combination with vested interests, along with deep, multi-month support providing a steel floor, the stock should find traction. The wildcard is overall market health heading into legalization; but assuming our politicians play nice, the best should soon be in front of Cam Battley and Co.
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