Trading on a major exchange can give a company access to a significant pool of investors, meaning easier access to funding and expedited growth. That's why listing on an exchange like the NYSE or NASDAQ is the goal for many pot stocks. However, with marijuana still illegal at the federal level in the U.S., cannabis companies operating in the U.S. are in violation of federal laws, meaning they cannot trade on either of those major exchanges.
Canada-based cannabis companies have been able to avoid that problem because pot is legal in Canada. Unfortunately, with many pot stocks struggling and the Horizons Marijuana Life Sciences ETF (HMLSF -10.22%) down more than 30% this year, some of them face a new problem -- getting delisted from the NYSE.
The NYSE's $1 requirement may push one company to make a big decision
One of the ways a company can run into trouble on the NYSE is if its share price drops below $1 for 30 trading days. If this happens, the exchange sends a warning requiring the company to make a plan for bringing its share price back above $1. That's what happened to Rite Aid (RAD -8.27%) in early 2019, when its stock was trading at $0.75 and was averaging a price of less than $1 over the past month. The company ended up staying on the exchange, but in order to do so, it made a 1:20 reverse stock split. The move instantly pushed the stock above $1.
It's something that marijuana giant Aurora Cannabis (ACB -4.38%) may need to do in order to remain on the NYSE as well. Before the coronavirus, the stock was hovering at about $1.30. In March, when the pandemic became front-and-center on newscasts around the world, the stock plummeted below $1, and it's been around that mark for the past few weeks. It briefly spiked up above $1, but for the most part, it's struggled below that level.
If Aurora were to do a reverse stock split, it wouldn't affect its valuation; it would only change its number of shares outstanding. It's not great for investors to see a company using a reverse split just to stay on an exchange, but it doesn't lead to dilution, either -- it just suggests there's little confidence from the company that the stock can stay above the $1 threshold on its own.
In the Rite Aid example, the stock would crater more than 40% in 2019 in what was looking to be another bad year for the company after the reverse stock split. However, the year was salvaged by an impressive earnings beat in December that sent the stock skyrocketing, erasing many of those losses.
A reverse stock split may fix one problem -- staying on a major exchange -- but it won't get investors excited about a stock. The danger for Aurora investors is that a reverse stock split could make it an attractive option for short-sellers, and that could lead to more losses along the way. Some brokerages have limits to prevent investors from shorting stocks that are trading below a certain value. That's where a boost in the price via a reverse stock split could actually do more harm than good for investors.
Why Aurora may be safe -- for now
The good news for Aurora investors is that in the wake of the coronavirus pandemic, the NYSE has decided to temporarily waive the minimum $1 requirement for a stock. In a statement, the NYSE said: "In its conversations with listed companies, the Exchange has learned that many companies are experiencing severe disruptions to their businesses during the current crisis, including employees who have contracted the COVID-19 virus and the need to adopt emergency measures to protect their employees from infection."
The last time the NYSE resorted to similar measures was during the housing-related financial crisis more than a decade ago.
What does this mean for investors?
Since the NYSE is not going to come after stocks hit hard as a result of the coronavirus pandemic, Aurora investors won't have to worry about the stock being delisted from the NYSE, at least for now. There was no date given as to when the NYSE's original rules may come back into play, but the new state of affairs may very well last at least until the pandemic is under control and businesses can resume their day-to-day operations.
In the end, this may prove to be just a waiting game for Aurora; the stock is already down about 60% this year, significantly worse than the benchmark Horizons ETF and the S&P 500, which is down just 14% year to date. The company is coming off a disappointing second-quarter result in February in which it posted another loss and forecasted potentially no sales growth for the next quarter.
There's simply little reason to be bullish on Aurora right now. Even if the pandemic temporarily stops the NYSE from warning the company to get its share price back up, it may only be a matter of time before that happens. Until the pot stock can show significant progress in its earnings reports and demonstrate a realistic possibility of breaking even, this is a stock investors should stay far away from.