Market Rebound? Not for These 2 Marijuana Stocks

Investors finally got the week they had hoped to see, producing a sizable rebound from last week's stock market lows. There's still plenty of uncertainty in the economy, but investors are starting to think that the Federal Reserve might not be as aggressive as feared in fighting inflation. The Dow Jones Industrial Average (^DJI -0.91%), S&P 500 (^GSPC -0.43%), and Nasdaq Composite (^IXIC -0.66%) were all up substantially on the week, including big gains on Friday.

Data source: Yahoo! Finance.

Gains were widespread across many different sectors of the market. But one area that missed out on the gains was the cannabis space, with marijuana stocks Aurora Cannabis (ACB -6.67%) and Canopy Growth (CGC -2.90%) weighing heavily on the industry. Let's look at what's holding marijuana stocks back and what could eventually bring a rebound.

Aurora Cannabis sells low

The worst performer among major marijuana stocks was Aurora Cannabis. The stock plunged 38% as the company had to resort to drastic measures in order to raise capital.

Image source: Getty Images.

Aurora Cannabis announced that it had boosted the size of an offering it had  made to underwriters, selling 61.2 million units for $150 million. That works out to $2.45 per unit, which was already below the closing price of $2.73 per share for Aurora's stock as of Thursday's close.

However, even worse is the fact that each unit includes not only one share of stock but also a warrant to buy an additional Aurora share at any time within the next three years. The exercise price for the warrant is $3.20 per share, which means that shares would have to nearly double from Friday's closing price between now and 2025 in order to give the warrants any value. Nevertheless, the creation of 61.2 million warrants dilutes any future gains that current shareholders might have hoped to earn if the cannabis company started to recover from its recent difficulties.

With the stock now well below $2 per share, some believe that another reverse stock split might be necessary soon to keep Aurora in compliance with exchange rules. That would bode poorly for the prospects for Aurora to generate any return for its longtime shareholders.

Canopy Growth sees no growth

Elsewhere, shares of Canopy Growth were down 12%. The company reported fiscal fourth-quarter results for the period ending March 31, and investors weren't satisfied with what they saw.

Net revenue of 112 million Canadian dollars for the quarter was down 25% year over year, closing  a fiscal year that saw sales fall 5%. In particular, sales of cannabis weighed heavily on the company, falling 35% for the quarter and 11% for the year. Better performance in other consumer products helped cushion the blow, but operating losses of CA$530 million for the quarter and CA$1.08 billion for the year didn't give investors much confidence.

Canopy Growth tried to emphasize its long-term strategy to build up its brand value, with strategic moves in the edibles and vaporizer areas. However, despite its calls to move more aggressively toward profitability, investors seem skeptical that Canopy can outpace peers in a highly competitive environment.

Excitement about marijuana stocks  that stemmed from expectations of U.S. federal legalization has given way to pessimism, and these two leaders in the space are struggling. At this point, it'll take significant changes to return Canopy Growth and Aurora Cannabis back to full health.