When a stock gets added to a top index like the S&P 500, it often leads to more bullishness and greater trading volume. Institutional investors, for instance, often have requirements as to the type of stocks they can hold, and if a stock doesn’t meet those, they can’t buy it. So if a stock gets added to an index, that can have a positive impact on its share price, while the reverse can have a negative effect.
In Canada, the S&P/TSX Composite is comparable to the S&P 500 as it holds the Toronto Stock Exchange’s top stocks and is a gauge of how the Canadian market is doing. It recently dropped marijuana producer Aurora Cannabis (ACB -3.85%) from its index. That also happened around the time Aurora released its latest earnings report, which was underwhelming. The one-two punch has sent its shares down lower, hitting a new 52-week low of $1.12 last week.
Why was the stock dropped from the index?
Although a reason wasn’t given for the deletion of Aurora from the S&P/TSX Composite, market capitalization is a key eligibility factor and seems to be the most likely reason for the change. Shares of Aurora have crashed 81% over the past 12 months (as of Sept. 26). With its market cap down to around $350 million, its valuation may simply be too low. Rival cannabis company OrganiGram Holdings has a market capitalization of $280 million, and it isn’t on the index, either. Meanwhile, Canopy Growth and Cronos Group, which are both worth more than $1 billion, are on there.
The positive news is that if Aurora’s stock price can recover, it’s possible for it to get back on the index. But that’s easier said than done.
Aurora’s latest financials don’t inspire much confidence
On Sept. 20, Aurora released its year-end results for fiscal 2022 (the period ended June 30). It was more of the same that investors have been used to, and unfortunately, not much to get excited about on either the top or bottom lines. The company’s net revenue totaled 50.2 million Canadian dollars for the most recent three-month period and was down 8% year over year. Medical cannabis net revenue, which is what Aurora’s focus is on, generated positive growth, but at 4%, it’s not going to drive much bullishness.
The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss shrank from CA$21.8 million a year ago to just a negative CA$12.9 million this past quarter. However, compared to the previous period (the third quarter), when its adjusted EBITDA loss was just CA$11.4 million, it looks like there hasn’t been any real improvement of late. Management, however, still promises additional cost savings by the end of the year, which should put it on track to be adjusted EBITDA-positive in the future.
Is Aurora Cannabis stock destined to go lower?
Between its lackluster earnings report and Aurora losing its place on Canada’s top index, it’s hard to see a path forward for Aurora that doesn’t involve its share price falling even lower than where it is today.
If that happens, it could mean another reverse stock split for the cannabis company. Two years ago, Aurora deployed a 1-for-12 reverse split in order to keep its share price above the $1 mark and stay compliant with Nasdaq listing requirements. It’s looking more and more likely that another reverse split will happen for Aurora sooner or later.
Things are going from bad to worse for Aurora, and even if the company achieves adjusted EBITDA profitability in the near future, that may not be enough to turn things around for the stock. Aurora badly needs a growth catalyst to get investors excited about its business again. Right now, there just isn’t much reason for optimism. For what it’s worth, the cannabis industry carries high risk but there are better options to consider.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends OrganiGram Holdings. The Motley Fool has a disclosure policy.
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