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PreMarket Prep Stock Of The Day: Aurora Cannabis

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action fo

Benzinga · 05/18/2020 17:24

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

For those who don't have the time to tune in live or listen to the podcast, Benzinga will highlight one stock that merits further discussion. This analysis is not a buy or sell recommendation.

There are difficult issues to trade and then are issues that nearly impossible to trade. In particular, those are issues that have undergone a reverse split.

Aurora Cannabis Inc. (NYSE: ACB) recently had a reverse-split and the corresponding price action makes it the PreMarket Prep Stock Of the Day.

What Is A Reverse Split?

A reverse stock split takes places when shares of corporate stock are merged to form a corresponding lower number of shares to the proportionally higher priced shares. It's most commonly used under negative circumstances. On most occasions, the issue has fallen so far in value that it no longer meets minimum share price standards of the exchange it's listed on.

By reducing the number of shares outstanding, these issues may be subject to a short squeeze. In other words, if the outstanding short interest gets too high and then is subject to good news, outstanding shorts could face lower liquidity in a rapidly rising market. In turn, this makes it increasing more difficult to cover the short position.

Just as the Canadian pot company was facing a delisting by the NYSE for falling under $1, the company announced a 1-for-12 price reverse split. After the split took place on Monday, May 11, its shares outstanding plummeted from roughly 1.3 billion to 110 million and diluted the share price according to one estimate by 30%.

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Without knowing the true ramifications of the reverse split, novice investors already deep in the red were tempted to plunge deeper into the issue. Also, aggressive shorts that view the issue as a $0 may have added to current short position and others may have initiated new ones.

From last Monday through last Thursday (may 14), the issue drifted lower from its May 8 adjusted close of $8.06 to a low of $5.63 before rebounding to end that session at $6.64.

Recipe For A Rally And Algos Kick In

After last Thursday;s close, the company reported a sequential 35% increase in sales for that far exceeded analysts expectations. For shorts banking on the company being a $0, this is not the news they wanted to hear.

After a higher open on Friday, it retreated but found support well ahead of the top of Thursday's range ($6.88) at $7.80 and raced to $11.88 before ending the session just off that high at $11.20. It should noted the rally took place monster volume of nearly 103 million shares compared to its 50-day average of 6 million

In today's session, algorithmic and momentum traders have feasted on the issue as it has added another 63% to $18.25 at time of writing. This comes in on top of its 69% gain on Friday.

See Also: Aurora Cannabis Shares Soar On Sales Beat: 'A Case Of The Patient Being Presumed Dead, When Indeed It's Not'

Moving Forward

When and where the reverse-split rally will end is impossible to predict. For the issue to reach its all-time high from October 2018 ($150.30), it may be an insurmountable task with the overhead supply of accumulated in the issue over the that last 19 months.

Therefore, investors enjoying profits on this incredible percentage-based rally based on its reverse stock price may want to choose a target somewhere between its current price and all-time high and hope for the best.