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Why Marijuana Stocks Dropped Today

By Rich Smith – Updated Sep 21, 2020 at 3:26PM

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This Jefferies "upgrade" is not as good as it sounds.

What happened

Canadian marijuana stock Aurora Cannabis (ACB -12.78%) won an upgrade from investment banker Jefferies Group this morning -- and the stock promptly tanked, falling 2.9% through 1:30 p.m. EDT. Larger marijuana producing rivals Canopy Growth (CGC -25.60%) and Aphria (APHA) are down as well, 3.9% and 5.2%, respectively.

Suffice it to say, this is not how upgrades usually work.  

Marijuana plants

Image source: Getty Images.

So what

Then again, this was kind of an unusual upgrade that Jefferies made.

Far from a full-throated endorsement of Aurora Cannabis stock, Jefferies only upgraded the shares from underperform to hold -- basically just removing its sell rating from the stock, and not actually recommending that anyone buy it. Moreover, even as Jefferies upgraded the shares, it downgraded its price target on Aurora Cannabis.

Instead of the 14 Canadian dollar-a-share target it previously assigned to the stock, Jefferies now says Aurora Cannabis stock is only worth CA$8.70 -- about $6.58, or just a few pennies more than what Aurora Cannabis was selling for before Jefferies made its "upgrade."

Essentially, therefore, Jefferies told investors that it didn't see much chance of Aurora Cannabis shares climbing any higher for the next 12 months -- which probably explains why investors aren't too enthusiastic about it today.

Now what

So much for Aurora Cannabis. Now why are Aurora's rivals' stocks also falling?

The answer to that question may lie in what Jefferies predicted for Aurora. The company faces "near-term liquidity risks" reports, and in order to continue investing in building out production it will probably need to raise more capital by selling shares. Presumably, other marijuana producers will have to keep on spending to match Aurora's investments, exacerbating the cash drain at Canopy Growth and Aphria as well. (None of these three companies are profitable or generating cash, by the way. All three are burning cash.)

That doesn't mean all three are in precisely the same boat, however, or explain why Canopy and Aphria stocks are going down more than Aurora Cannabis today. After all, in contrast to Aurora Cannabis, which carries $263 million more debt on its books than it has cash on hand, Aphria actually has $60 million more cash on its books than debt, and Canopy Growth has a cash surplus of more than $1 billion.

Granted, until these companies begin generating positive free cash flow, even these sizable cash reserves will remain at risk -- but the way I see it, the risk is greater at Aurora Cannabis than at Canopy Growth or Aphria.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
$2.79 (-25.60%) $0.96
Aurora Cannabis Stock Quote
Aurora Cannabis
$1.16 (-12.78%) $0.17
Aphria Inc. Stock Quote
Aphria Inc.

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