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Why Aurora Cannabis, OrganiGram Holdings, and HEXO Dropped, Then Bounced Friday

What happened

Cannabis stocks have been on a wild ride this week starting with chatter among Reddit users that likely caused a surge across the sector. That trend reversed on Thursday, however, and the stocks are bouncing around again today.

Shares of OrganiGram Holdings (NASDAQ: OGI), for example, dropped 14% early Friday morning, before reversing to a 15% gain as of 10:55 a.m. EST. Shares of Aurora Cannabis (NYSE: ACB) and HEXO (NYSE: HEXO) were also each down double digits early in the session, but have settled back to a drop of 7% and a gain of 3%, respectively.

So what

Along with the retail trading volatility, there is some news for investors to digest today. Aurora Cannabis announced its fiscal 2021 second quarter results last night, reporting progress on its business transformation plan.

Image source: Getty Images.

Now what

Aurora has spent much of the past year raising capital and restructuring its business in an effort to contain its losses. The changes included cutting jobs, closing operations to consolidate production, and selling additional stock. The goals are to reduce expenses, more closely scrutinize capital expenditures, and improve the balance sheet en route to attaining profitability.

In a recent business update, however, Aurora warned that its "back to basics" business strategy "will delay the company's ability to achieve positive adjusted EBITDA as management invests in its consumer business." But in yesterday's report, the company said it is progressing nicely against its plan. "We are confident that this will give Aurora maximum flexibility and position the organization to drive significant cashflow in the coming quarters," Aurora CEO Miguel Martin commented regarding the new strategy. The company reported consumer and medical cannabis net revenue increased 25% and 42% respectively, versus the prior year period.

OrganiGram reported its Canadian adult recreational use net revenue grew 30% in its fiscal 2021 first quarter report last month, but overall net revenue dropped 23% compared to the year-ago period. With a market capitalization of about $960 million, OrganiGram is smaller than these peers, and some investors believe it has more potential.

Other investor optimism comes from speculation on legalization in the U.S. Some Canadian cannabis growers are already positioning themselves for the possibility. HEXO just named a general manager of U.S. operations to oversee growth initiatives of Truss CBD USA, the company's joint venture with brewer Molson Coors (NYSE: TAP). The company is also working with "potential non-beverage CPG partners with whom we are in ongoing discussions," as part of its U.S. operations, according to HEXO CEO and co-founder Sebastien St-Louis.

Investors in the cannabis sector need to be comfortable with volatile share prices, as experienced today. As the industry continues to develop, however, there will be more business fundamentals to follow rather than simply speculating on potential growth. That is where investor focus should remain.

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Howard Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends OrganiGram Holdings. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.


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