The Motley Fool

Why Did Canopy Growth, Aurora Cannabis and Its Pot Peers Surge Yesterday?

Image source: Getty Images

Cannabis companies such as Canopy Growth (TSX:WEED)(NYSE:CGC), Aurora Cannabis (TSX:ACB)(NYSE:ACB), Aphria, and many others were on a roll yesterday, following comments by democratic vice-presidential candidate Kamala Harris and Vermont’s Republican Governor Phil Scott.

During the vice-presidential debate, Senator Harris claimed if elected to power the Joe Biden government will decriminalize marijuana. Further, Scott confirmed he would allow the legalization of cannabis to move ahead in the state of Vermont.

These two comments were enough to fuel a rally for Aurora Cannabis and a host of other pot stocks.  Leading the pack was Charlotte’s Web Holdings that surged 15.8%, followed by Canopy Growth, OrganiGram, Curaleaf, Aphria, Aurora Cannabis, and Cronos Group at 13%, 11.5%, 10.5%, 10.3%, 10%, and 8.9%, respectively.

The Horizons Marijuana Life Sciences ETF gained 6.5% while other notable stock movements include Village Farms and Hexo that rose 7.1% and 6.5% respectively.

The recent rally is not sustainable

We can see that the upward spiral in marijuana stocks was driven purely on market sentiment especially in the case of the statement made by Senator Harris. First, the democrats need to ensure that they are voted to power. Further, decriminalizing marijuana is not the same as legalizing it.

Make no mistake: cannabis companies are bound to move significantly higher if and when the U.S. legalizes recreational use at the federal level. However, this process might be at least a couple of years away.

While the recent comments from political figures bode well for investors, it might just provide temporary relief given the host of structural challenges the companies have faced in recent times.

Pot heavyweights Canopy Growth and Aurora Cannabis have seen their stock prices sink for close to two years now. This elongated bull run has been driven by the slow rollout of retail stores in Canada, higher tax rates that has enabled a thriving black market, regulatory issues, health concerns related to vaping, and many others.

This has led to oversupply, high inventory levels, million-dollar write-downs, low profitability, and significant cash burn for Aurora Cannabis and other most other marijuana companies.

Aurora Cannabis recently announced its fiscal fourth quarter of 2020 results and reported revenue of $72 million, a sequential decline of 5%. The company also provided a tepid outlook resulting in the stock declining by 50% last month.

Aurora reported a $1.6 billion inventory write-down which indicates it has grossly paid for acquisitions. Further, its aim to reach break-even EBITDA by the December quarter seems like a distant dream given its slowing sales growth and an EBITDA loss of $34 million in the June quarter.

The Foolish takeaway

While there is progress made in terms of the legalization of cannabis products in a few countries, it has been more slow than steady. The U.S. is a massive market and several marijuana companies are already establishing a supply chain there to ensure they have a presence when pot products are legalized.

Canopy Growth, for example, has positioned itself to expand quickly south of the border and could be one of the top-performing stocks if legalization expectations come true.

Speaking of Canadian stocks to buy right now....

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

The Motley Fool owns shares of and recommends Charlottes Web Holdings and OrganiGram Holdings. The Motley Fool owns shares of Village Farms International, Inc. The Motley Fool recommends HEXO., HEXO., and OrganiGram Holdings. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.