Aurora Cannabis (NYSE:ACB) has been a strong performer as of late, with Aurora stock rallying over 74% in the past month. But, as investors jump back into cannabis plays like this one, should you join them?

It’s debatable. With potential political changes in the United States, along with more U.S. states pushing for legalization, a game-changing catalyst could be around the corner. Yet, this company may not be your best bet on a continued legalization wave.

Why? While one of the best known marijuana stocks out there, the company continues to have precarious financials. Unlike rivals such as Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON), this company lacks a strategic partner with deep pockets. Without one, the company is running on fumes, dependent on capital infusions to keep the lights on.

However, it’s also risky to bet against this pot stock “also-ran.” Shares remain highly vulnerable to short-squeezes. If you want to bet this stock will head to zero, you’ll have to put up with a lot of volatility.

With this in mind, steering clear of this stock, on both the long and short sides, may be the best play.

Why Aurora Stock Faces a Tough Road Ahead

After beating on earnings, and indicating its financial situation was stronger than previously feared, ACB stock soared tremendously in mid-May. Shares rallied 68.7% on May 15 alone. But after that rip higher, interest in the company’s shares took a breather.

And based on some analyst views on the stock, that’s no surprise. Last month, Jeffries’ Owen Bennett downgraded shares. The analyst believes valuation does not reflect the company’s greater level of risk relative to its peers. Giving shares the equivalent to a “sell” rating, Bennett’s price target on the stock is $10 per share.

I agree with Bennett’s concerns. Sure, the company trades at a lower valuation than Canopy and Cronos. But both these companies are in a much stronger place than Aurora. Canopy has Constellation Brands (NYSE:STZ) in its corner. With Constellation’s capital and management expertise, it stands a greater chance of scaling into a profitable business. The same goes for Cronos, which has the backing of tobacco giant Altria Group (NYSE:MO).

Without this support, the company continues to face a tough road ahead. As InvestorPlace’s Will Ashworth wrote June 3, the company’s cash position pales in comparison to that of Canopy. As the company burns through cash, more dilutive equity raises are probably in the cards. This could mean shares head lower, as the current shareholders’ piece of the pie gets smaller and smaller.

Yet, these negative factors don’t necessarily mean shares are headed back to the single-digits. Additional developments could cause short squeezes, leading to big losses for those who bet against this stock.

Why ACB Is Vulnerable to Short Squeezes

It seems inevitable that the company will pursue dilutive stock sales to improve its finances. But, this doesn’t mean it’s safe to short this stock. How so? The risk of additional short squeezes is far too great.

As it stands now, 19.6% of the stock’s float has been sold short. Betting against Aurora stock has become a crowded trade. Even a slight improvement to their finances will lead these short-sellers to cover their positions. This increases demand for the stock.

But, that’s not all. With many retail investors buying on headlines, momentum, or just plain FOMO, more buying demand enters the stock.

This makes it harder for the shorts to cover. In other words, a short squeeze. As this commentator wrote, that’s probably what caused the big one day moves last month.

Granted, short squeezes are usually temporary. But there’s a lot of potential short squeezes on the horizon. Next quarter’s earnings could surprise, causing a squeeze. Also, this November’s U.S. elections may shift control to a party more favorable to legalization. This may also cause a short squeeze, as speculators buy on the headlines.

Don’t take this dynamic as a reason to buy the stock, however. As the fundamentals remain weak, shares are likely heading lower in the long term. But, as a stock to short, it’s far too volatile.

Steer Clear of This Stock

The pot sector as-a-whole remains a high-risk, high-return opportunity. But don’t consider this company to be one of the stronger plays out there. Rivals Canopy and Cronos stand a greater chance of reaching profitability, making them more solid bets on this long-term trend.

Yet, while Aurora stock has many fleas, its vulnerability to short squeezes makes it tough to bet against. In other words, with no reason to go long or short, avoid this stock completely.

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