Cannabis ETFs Pare Gains Tuesday After Aurora Prompted Major Moves

The key cannabis players in Canada have been brutalized by price declines since the recreational legalization on October 17, 2018, with many investors wondering if the cannabis trend would ever take off as anticipated.

Well, after over a year of stock price declines, last Friday Aurora Cannabis surged past its 50-day moving average after beating revenue expectations handily.

Aurora Cannabis shares jumped 73.2% on Friday, breaking above its short-term resistance at the 50-day simple moving average.

While Aurora said the pandemic would likely reveal a greater effect on business in the fourth quarter, the coronavirus so far did not “materially disrupt” operations in the third quarter, Investor’s Business Daily reports. It pointed out that customers stocked up in March in anticipation of the broad shutdown measures, but the trend cooled off in April.

MKM analyst Bill Kirk said Aurora Cannabis Inc. is not out of the woods yet, however.

The stock has been ripping higher for the last two sessions, has gained an incredible 93% in the month to date, and was up another 14% in premarket trade Tuesday.

In addition to besting revenue estimates the pot company said it expects to have positive adjusted Ebitda in the first quarter of 2021.

“With an uncertain revenue outlook, we don’t yet have enough confidence in cost-cutting measures to rely on their 1Q’21 positive adjusted EBITDA goal,” Kirk wrote in a note to clients. “If sequential growth slows/stalls (April/May worse than March), the best-case 1Q’21 gross profit dollars would be ~C$45mn, which would be more than fully offset by SG&A and R&D expenses (~C$60mn).”

Despite an effort to curb expenses, Aurora’s third-quarter sales, general and admin costs climbed 21% from a year ago and overcame sales growth of just 16%. Kirk said he also expects an additional C$1 billion in writedowns in the next quarter when the company will retest its goodwill.

Despite increased purchasing earlier in the year, as consumers projected issues acquiring supply once the pandemic heated up, the MKM analyst also expressed concerns of oversupply versus the current demand.

“Finally, despite the efforts to streamline production, Aurora is still growing far more cannabis than it is able to sell (3Q: 36,207 kg grown vs. 12,729 kg sold; YTD: 108,334 kg grown vs. 34,693 kg sold),” said the note. “We don’t see demand growth accelerating enough to consume this inventory and expect Aurora to ultimately write it down.”

The Cannabis ETF (NYSEARCA: THCX) has plummeted 23% in the year to date, but rallied 6.7% Friday amid the news, before paring gains this week.

While paring gains Tuesday, among the best performing non-leveraged ETFs of Friday which contains Aurora, the ETFMG Alternative Harvest ETF (NYSEArca: MJ)  advanced 7.7%, Cambria Cannabis ETF (TOKE) increased 4.2%, Global X Cannabis ETF (NASDAQ: POTX) surged 13.6%.

For more market trends, visit  ETF Trends.