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Stock Market News: Why Luckin Coffee and Aurora Cannabis Plunged Wednesday Morning

By Dan Caplinger – Updated May 20, 2020 at 11:44AM

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The overall market gained ground, but these two companies got left behind.

The stock market got its mojo back on Wednesday morning, with investors growing more excited about the future. Some market participants believe that reopening businesses will bring a strong recovery without further assistance, while others expect lawmakers in Washington to add further economic stimulus measures to support ailing companies. Both views supported bullish moves for major market benchmarks. Just before 11 a.m. EDT, the Dow Jones Industrial Average (^DJI -1.15%) was up 392 points to 24,599. The S&P 500 (^GSPC -1.02%) picked up 50 points to 2,973, and the Nasdaq Composite (^IXIC) rose 169 points to 9,354.

Yet even as most stocks enjoyed the updraft, a few hard-hit companies were left out. Luckin Coffee (LKNC.Y -1.52%) saw its shares trade for the first time in more than a month, and a rush of selling pressure showed the challenges that the Chinese coffee company faces. Meanwhile, in the marijuana stock sector, Aurora Cannabis (ACB 7.26%) gave back some of its recent gains on fears that its rebound could prove short-lived.

Luck runs out for Luckin

Shares of Luckin Coffee plunged 35% Wednesday morning. Following extensive bad news, investors got their first chance to trade the stock since Nasdaq suspended trading in early April -- but they might not have much time.

Person holding Luckin Coffee cup, with promotional ad copy in Chinese.

Image source: Luckin Coffee.

Luckin had last traded on April 6, following its announcement of an internal investigation into fraudulent accounting practices and fabricated transactions. The investigation required Luckin to withdraw its financial statements for the first three quarters of 2019 and caused a delay in further financial reports. Trading was halted until Luckin could provide additional information to the stock exchange.

Since then, Nasdaq has looked to delist Luckin, citing concerns about the inflated sales figures. If the stock exchange does so, then Luckin shareholders would have to turn to over-the-counter trading, with far less liquidity and transparency than listed companies provide. Luckin will likely appeal the delisting notice, and that could give investors a month or two before a final decision is made.

So far, Luckin hasn't revealed anything to contradict the growing notion that its business will take a big hit. With stock analysts believing that the Chinese coffee company will have to close stores and rein in any further growth opportunities, Luckin may never fully recover from the scandal.

Up in smoke

Elsewhere, Aurora Cannabis saw its stock fall 13%, adding to its losses from Tuesday. The marijuana company has been quite volatile since it announced its latest financial results last week, with many of those following Aurora taking opposing views about its potential.

On one hand, Aurora still has plenty of opportunities to grow in the marijuana space. The company still hasn't taken full advantage of the Canadian retail marijuana market, and now that Aurora has taken steps to cut back on unnecessary expenses, investors are optimistic that the cannabis company will see its rate of cash burn slow down. That could reduce the need for dilutive capital-raising efforts, which would be a welcome change for Aurora.

Today's bearish views come from a different angle. Analysts at Raymond James pointed out that Aurora isn't doing as well as peers like OrganiGram Holdings and Village Farms International, which have posted positive adjusted pre-tax operating earnings consistently and pose a potential threat to Aurora's market share. Moreover, despite past impairment charges, Aurora still has plenty of assets on its balance sheet that might require further writedowns in the future.

Aurora has delivered huge losses to shareholders over the past year, and even the recent bounce in the shares didn't do much to get the marijuana stock back to its winning ways. Aurora still has to overcome significant challenges if it wants to remain a leader in the cannabis space.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. and OrganiGram Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Aurora Cannabis Inc. Stock Quote
Aurora Cannabis Inc.
$1.33 (7.26%) $0.09
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
$16.20 (-1.52%) $0.25
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,926.94 (-1.15%) $-346.93
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,744.52 (-1.02%) $-38.76
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$11,148.64 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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