The financial markets recently experienced a milestone event, with the Dow Jones Industrial Average reaching new peaks and the S&P 500 extending its bullish trend, now close to its two-year mark.
Amidst this bullish upswing, one industry has been steadily gaining attention -- the cannabis industry. In 2024, cannabis stocks have not only matched but in many cases, surpassed the performance of these benchmark indices.
Image Source: Getty Images.
This year, investors have taken a particular interest in the cannabis industry, directing a fair amount of cash toward industry leaders like Aurora Cannabis(NASDAQ: ACB), Canopy Growth, Curaleaf Holdings, Green Thumb Industries, and Innovative Industrial Properties.
This cash infusion stems from two primary factors:
- Projected market growth: The global cannabis market is on the brink of substantial growth over the next decade. Predictions by industry specialists indicate that the medical marijuana segment will grow at a robust mid-double-digit percentage annually throughout the 2020s. The recreational segment is expected to exceed these projections, with anticipated growth rates of over 20% per year.
- Easing prohibition: The long-standing ban on marijuana is gradually weakening around the globe. Germany, which is expected to become Europe's biggest cannabis market, has started legalizing possession of small quantities for adult use. Industry observers view this as a step toward potential full legalization within the forthcoming decade.
Further fueling the industry's growth, President Joe Biden recently announced a pivotal policy shift. The government plans to reclassify marijuana from Schedule I to Schedule III under the Controlled Substances Act. This move should promote clinical research that may one day lead to nationwide legalization.
Is Aurora Cannabis stock a buy?
Should investors with a moderate risk appetite pick up shares of leading companies like Aurora Cannabis?
Let's answer this question by breaking down Aurora's core value proposition and comparing it to alternative investment options such as the cannabis-centric Amplify Alternative Harvest ETF, the Vanguard S&P 500 ETF, and the Vanguard Total Bond Market Index Fund.
Aurora's core value proposition
Aurora Cannabis has been strategically realigning its operations, focusing on scaling back production and shifting toward the more profitable medical cannabis sector to strengthen its core business.
Reflecting on Aurora's journey, I recommended its stock as a "buy" in September last year. Since that endorsement, the stock has declined by approximately 13%. Despite this, Aurora's shares have demonstrated resilience, rebounding from a 12-month nadir in late March.
My confidence in Aurora's stock persists, primarily because of its strategic shift to medical cannabis. This segment offers inherent competitive advantages, more stable profit margins than the recreational market, and a promising growth trajectory.
Aurora's performance relative to top ETFs
Investors should always weigh a company's value proposition against pertinent ETFs. In 2024, Aurora's stock performance eclipsed that of the three ETFs mentioned below, signaling an improvement in the company's fundamentals.
However, it's important to note that Aurora's stock has significantly eroded the initial investment of early shareholders since its IPO. This fact highlights a cautionary tale for potential investors.
Aurora's history of shareholder dilution and the evolving legal cannabis landscape suggest that further capital infusions may be necessary to maintain competitiveness.
Equity | Year-to-date performance (%) | 5-yr performance (%) |
|---|---|---|
Aurora Cannabis | 54.9 | -99.3 |
Vanguard S&P 500 ETF | 11.8 | 101.2 |
Vanguard Total Bond Index Fund ETF | -1.22 | 0.78 |
Amplify Alternative Harvest ETF | 35.3 | -84.5 |
Table 1: Stock and ETF performance, including dividend payments and share price appreciation. Data per Yahoo! Finance.
Verdict
Forecasting the trajectory of a company like Aurora Cannabis presents a formidable task. The entity Aurora represents today may undergo transformative changes over the next decade. Should Aurora maintain its momentum in the medical cannabis market, its current valuation could be significantly underestimated.
However, the current legal environment in many key markets remains a substantial hurdle. Consequently, Aurora's stock may be most appropriate for investors comfortable with high volatility and uncertainty.
Despite these challenges, the optimism on Wall Street that suggests a potential 300% increase in Aurora's stock price, based on the average 12-month analyst price target, appears to be within the realm of possibility. This marijuana stock, in turn, may be worth taking a flier on right now.
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George Budwell has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Green Thumb Industries, Innovative Industrial Properties, Vanguard Bond Index Funds-Vanguard Total Bond Market ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
