What happened
Marijuana stocks had been soaring since the U.S. election, but the last five days have marked a reversal. After an earlier drop of 10%, shares of Aurora Cannabis (ACB +1.14%) were down 5% as of 1:45 p.m. EST. HEXO (HEXO +0.00%) shares are down 9%, and Sundial Growers (SNDL +1.30%) 18% at the same time.
The stocks of the three companies have risen between 60% and 200% just since the election. But each is down double digits in the past week as well as since the start of 2020.
So what
The surge hasn't compensated for what's been a rough year for cannabis stocks. And there are fundamental reasons why shares in companies like Aurora are down sharply this year.
Image source: Getty Images.
Aurora spent much of this year restructuring its business and raising capital as it incurred growing losses. The changes included cutting jobs, consolidating production, and selling additional stock to raise money. Even with its pop since the election, shares are down about 60% since the start of the year.
The only real news today came from HEXO. In late October the company proposed a reverse stock split to enable the stock to remain in compliance with the minimum standards of the New York Stock Exchange. Today, the company announced it plans to revise the proposed 8-for-1 split down to 4-for-1, since its shares have risen by 36% since the original announcement.
Now what
A reverse stock split doesn't change the business fundamentals of a company. The need for one is typically not a good sign, as it is essentially due to a dropping share price. So HEXO changing the share consolidation plan doesn't really indicate anything other than acknowledging the recent jump in share price.
Shares of HEXO, as well as Aurora and Sundial, have moved since the election, when five states passed ballot initiatives concerning the legalization of marijuana. Another somewhat positive development came last week when a United Nations commission voted to remove medical cannabis from the list of Schedule IV drugs created at the 1961 Single Convention on Narcotic Drugs. That vote doesn't immediately change any legislation, but it is symbolic as it removes it from the highest level of a group of dangerous drugs, which includes heroin.
Investors need to continue to monitor regulatory developments to predict the future potential of these stocks. Just as importantly, the business fundamentals will determine if they can even stay viable until a potential expansion of the market comes through legislation. In the meantime, investors should expect a continued high amount of volatility.
