Aurora Cannabis (NYSE:ACB) stock dropped nearly 12% on Friday, Nov. 22. This was one day after the stock rose nearly 15% on the news that the U.S. House of Representatives Judiciary Committee voted in favor of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act.
Since hitting a 52-week high in March 2019, ACB stock has been on a consistent downward trend. Most concerning to investors is that the stock has fallen precipitously since the middle of September.
Then on Oct. 31, ACB posted a disastrous earnings report. As if that wasn’t enough, the company announced a debt conversion plan and ATM stock offering that looked like desperate attempts to conserve cash.
This gives investors good reasons to sour on ACB stock. And rumors of a bill that is not likely to make it to the Senate for a vote is not enough to change the stock’s downward trend.
ACB Stock Needs More Than Hope
The MORE bill seeks to lift the federal ban on cannabis in the United States. If passed, the bill would also overturn past convictions for cannabis offenders.
The problem is that the bill is really nothing more than an empty gesture. Even if the vote passes the Democrat-controlled House of Representatives, it is unlikely the bill makes it to the floor of the Republican-controlled Senate. And even if comes to a vote, it is unlikely to receive the 60 votes needed to pass.
Senate Majority Leader Mitch McConnell has repeatedly spoken of his opposition to legalizing marijuana. And Georgia Rep. Doug Collins, the Judiciary Committee’s top Republican, did not vote for the measure adding, “Do we want to accomplish something or do we just want to make a political statement?”
Why Did ACB Stock Rise?
The cannabis market looks oversold. Any positive news was confirmation of at least one technical indicator.
One measurement of a stock’s momentum is the Relative Strength Index (RSI). In general an RSI around 70 indicates a stock may be overbought. Conversely, an RSI around 30 indicates a stock may be oversold. At several points in the last six months, ACB stock’s RSI has dipped to 30 or lower.
In each case, the stock has seen a slight bounce. However, in the last couple months, the bounce has led to lower highs, sending the stock to its current level. In the most recent example, the stock bounced but is failing to approach a previous level of resistance around $3.80.
The Canadian Market Is Not Opening as Quickly as Expected
Canada has made marijuana legal for both recreational and medicinal use. But the roll-out is going slower than forecast. Even when product does start to move freely, there will not be enough demand to cover the oversupply.
And a lack of demand is the real issue. Companies like Aurora Cannabis and Canopy Growth (NYSE:CGC) have more than enough supply. But the demand has to come from somewhere. Right now, the market that offers the greatest potential is still largely closed off.
The path to profit for cannabis companies will come through the United States. But that will take time — something that Aurora Cannabis has in short supply.
Aurora Cannabis May Not Make It to the Finish Line
I have previously expressed my strong belief that legalization of cannabis in the United States is a question of when, not if. Athletes for CARE, a nonprofit formed by current and former professional athletes dedicated to using their influence for social change, is petitioning the World Doping Agency to remove cannabis from its list of banned substances. A growing number of former NFL players are also supporting the use of CBD and other cannabis-related products as an alternative to opioid-based painkillers.
And it’s not just current and retired athletes that are advocating for legalization. As consumers are becoming aware of the dangers and limitations of prescription painkillers, they are demanding solutions that cannabis can provide.
As the MORE Act makes clear, the path to legalization on the Federal level may still be a long time coming. In the meantime, there will be many cannabis companies that won’t make it to see what should be a profitable future. The trend is not being a friend to ACB stock.
Barring a real catalyst, and not just false hope, it is unlikely that institutional investors are going to drive ACB stock up to a meaningful level in the next few months.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.