Don’t look now, but the cannabis sector is abuzz as Aurora’s (NYSE:ACB) reverse stock split is under way. We can only imagine that some shareholders might think they hit the jackpot as their shares suddenly gain more than 1,000% in price.
Of course, there’s no jackpot here but only a combining of many cheap shares into a lesser number of more expensive shares. Cannabis-market critics will likely claim that Aurora’s reverse stock split signals trouble for the company.
On the other hand, the reverse split could be part of Aurora’s turnaround plan. After all, desperate times call for desperate measures. Besides, shouldn’t bargain hunters seize the opportunity to grab shares of Aurora stock in the company’s darkest hour?
Every coin has two sides, so let’s break it down and see if the newly reverse-split Aurora shares will be worth our investing capital.
Avoiding the Worst … for Now
“Delisting” is a word that can send shivers down the spine of an investor. It’s chiefly only used in connection with risky assets, and pretty much any cannabis-sector investment carries a considerable amount of risk.
If you’re been paying attention to the cannabis market for a while, you might recall how exciting it was when Aurora stock got listed on the New York Stock Exchange. It was a time when cannabis stocks were making tremendous gains.
Those were the good old days, but the peak years of 2016 to 2018 are behind us. As the hype wore off, cannabis stock prices deflated and Aurora stock shares stair-stepped their way below $1 per share.
When a stock trades below $1 per share for more than 30 days, it’s out of compliance with the New York Stock exchange’s guidelines. That’s when the scary word “delisting” comes into play. Ideally, a company in that precarious position will make fundamental improvements in order to restore shareholder confidence.
If an increase in shareholder confidence causes the stock price to get back above $1 and stay there, then the problem is solved. Another way to solve the problem is to institute a reverse-stock split, though that’s an artificial way to inflate the per-share price.
Aurora evidently took the easy route when the company’s board approved a 12-for-1 reverse split to take place in May. And so here we are in May, and Aurora’s stock price will indeed stay above $1 and delisting will, for now at least, be averted.
Dilution Solution?
Share dilution, in which a company issues more stock shares and thereby may end up devaluing those shares, is a major concern for investors. And while Aurora may have avoided the delisting threat for the time being, the dilution issue is now rearing its ugly head.
It is reportedly the case that the Aurora’s reverse split will reduce the number of stock shares from over 1.3 billion to around 110 million. That suggests the opposite of dilution, right?
But at the same time, it has been reported that Aurora intends to issue and sell more of its stock shares. In fact, the company might issue as much as $350 million worth of its stock shares in order to raise much-needed capital.
Aurora already used up the $400 million generated from a previous at-the-market financing program. Jefferies analyst Owen Bennett believes that Aurora’s current financing will lead to share dilution of around 30%.
While that figure isn’t currently substantiated, the mere thought of potential 30% stock-share dilution should concern any cautious investor. In any case, don’t count the current reverse split as a permanent solution to Aurora’s share-dilution issue.
The Takeaway on Aurora Stock
Aurora seems to have sidestepped the delisting threat for the moment. That’s all fine and good, but the threat of dilution is real so prospective Aurora stockholders might consider other cannabis-sector investments.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
