Aurora Cannabis (TSX:ACB)(NYSE:ACB) stock jumped 9.9% on January 10. Shares have climbed 16.2% in 2019 so far. Positive momentum on the TSX has propelled cannabis stocks after the sector suffered a brutal stretch immediately following recreational legalization on October 17.
In late October, I’d warned investors not to dramatically shift their long-term strategy as the sector was being hit hard. The timing for legalization was unfortunate as the global stock market suffered its worst stretch since the financial crisis in late 2018. The Canadian cannabis sector has also been plagued by supply issues in the early months of legalization — something predicted by experts leading up to the legalization date.
Back in December, I’d discussed whether Aurora Cannabis could climb back to all-time highs in 2019. I’d concluded that the stock was a speculative buy in a choppy market. This was back when Aurora was priced around the $7.50 mark. The stock closed at $7.88 on January 10.
In a way, that puts us back at square one when analyzing Aurora today. On January 8, the company provided guidance for the second quarter of fiscal 2019. It forecast revenues between $50 million and $55 million. This quarter represents the first batch of results that would include revenues from legalization.
Aurora reported that it was able to ramp up its production capacity to 70,000 kilograms per annum in November 2018 and 100,000 kilograms annually as of the early January update. It expects to achieve 150,000 kilograms per annum of production by the end of the third quarter of fiscal 2019. Aurora hopes that the finalization of the draft of regulations, which will introduce products like vape pens, beverages, and edibles into the legal market, will be a boost later in the year.
The revenue projections from Aurora fell below analyst consensus estimates. Thomson Reuters reported that analysts had expected revenues to hit $67 million in the second quarter of fiscal 2019. It has been difficult for analysts to project revenues in the young industry, especially as Canadian provinces have struggled to effectively introduce the legal market to consumers. Several large cities in Ontario, including Ottawa and Hamilton, have dragged their feet when it comes to introducing a retail framework that will serve consumers in those markets.
Fortunately, Aurora has established a strong retail footprint in its home province of Alberta. Large cannabis executives are now warning that the Canadian cannabis shortage could stretch over into the next decade, which could tighten the margins for producers in the coming quarters. Aurora projects that it will start to achieve sustained positive earnings by the fourth quarter of fiscal 2019.
Aurora looks like the safest hold in the cannabis space this year. The stock has the chance to push into double digits on the back of its Q2 report, as shares have quickly rebounded from the lukewarm news on future revenues. The cannabis sector will not be the growth darling it was in previous years, which means that investors who are on the hunt for solid returns should be targeting safe options that are at a fair price. Aurora fits the bill as we head into the middle of January.
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Fool contributor Ambrose O'Callaghan owns shares of Aurora Cannabis.