Why you should avoid Aurora bearings before splitting

<p>Marijuana stocks like Aurora Cannabis (NYSE: ACB) already had a terrible year. And then the new coronavirus struck and pushed things from bad to worse for the Aurora stock.

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In theory, it should not have been all bad news. Tobacco and alcohol sales, for example, have risen sharply in both grocery stores and liquor stores. Many states have even declared alcohol an important service, allowing beer and wine shops to remain open.

But marijuana companies are struggling, and Aurora shares continued to fall to multi-year declines.

There is a simple reason that explains the difference. Tobacco and alcohol are established industries with powerful brands and established buying patterns. Cannabis, on the other hand, is an upcoming industry. Companies like Aurora are still trying to develop the first-hand advantage. This was the crucial moment in getting their brands to the benefit of consumers and creating sustainable and profitable distribution channels.

With coronavirus, many stores are closed or do much less business. In addition, licensing and legal processes for new marijuana markets and outlets have stopped. Companies like ACB are now losing significant sums of money with the intention of making a comeback later when cannabis matures into a robust market.

But 2020 is shaping up to be a lost year on that front, and that has made Aurora a little financially binding. As a result, shareholders are likely to face more setbacks in the coming months.

A reverse split comes for Aurora Stock

In its recently planned business transformation plan, which it presented to shareholders, Aurora mentioned that it will conduct a reverse split next month. On or about May 11, all current 12 shares in the Aurora share will become a new share in Aurora Cannabis.

For example, if you now own 600 shares, there would be 50 new shares. Meanwhile, the share price should also increase about 12 times after the split. So the theoretical investment of 600 shares would still be worth $ 450. But now it will be in the form of 50 shares at $ 9 each, instead of 600 shares worth 75 cents per pop.

The company does this to avoid delisting. If a company’s stock stays below $ 1 per share for an extended period of time, it can be removed from the stock market. Reverse split will avoid that and bring the stock price back to a much higher level.

Disadvantages of Split

It is fantastic that Aurora retains its listing in the United States. it is an important move to maintain a solid shareholder base and raise capital. But there are also disadvantages.

First, stock prices usually tend to fall during the reverse split process. On the one hand, many traders stop buying a stock after a reverse split. A $ 1 stock may appear to have more upwards than a $ 10 stock; in any case, people are attracted to cheap warehouses.

Another issue is that it will trigger more card sales. Many brokers make it difficult or impossible to sell companies that trade below $ 5 or $ 2.50 per share. Aurora, backed up to $ 9, will be easy to bet on again.

In addition to this, the company announced that it intends to sell more new shares to the public via a new “ATM” offer. This will result in both the company itself and the card seller likely to cause downward pressure on the share price next month.

Still a chance for recovery

When you look at a 75-cent stock that is doing a reverse split, you can assume that the company is in serious trouble. While Aurora’s short-term prospects are really bleak, the company still has a shot.

ACB still has a market value approaching $ 1 billion. The business has expanded significantly in recent quarters, and the company confirmed that revenues would continue to grow during the back half of 2020 despite the virus.

In the future, there should be many markets that come online, both when individual US states legalize and more countries follow abroad. While Aurora has had to secure part of its business to cut costs, it still has one of the widest footprints from marijuana companies and will benefit as the industry gets more adoption worldwide.

And from the last quarter, the company had significant cash balances, with almost 20% of its market capitalization consisting of cash. Throw in revenue from the ATM, and Aurora will be involved in this for a long time.

The marijuana market obviously needs to work together, but when things go back for the industry, Aurora can be a winner.

The conclusion of the ACB

There really is still an investment case for Aurora Cannabis. The company is down, but it is not out of the picture. In fact, there are still many positive catalysts that can swing momentum again in favor of cannabis companies within the next year.

However, if you want to buy the stock, there is no need to hurry. The forthcoming reverse split may cause a sharp decline in Aurora’s share next month. With the setting to take effect on May 11, you should consider waiting until mid-May to make some purchases. In the next few weeks, the trend is likely to continue lower.

Ian Bezek has written more than 1000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $ 300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of writing, he had no positions in any of the above securities.