UPDATE August 18, 2018: Aurora Cannabis Inc (TSX:ACB) (OTCQB:ACBFF) (FRA:21P) is a portfolio holding of Midas Letter Media Corp.

While the Constellation-Canopy announcement dominated today’s cannabis sector headlines, Aurora Cannabis Inc (TSX:ACB) (OTCQB:ACBFF) (FRA:21P) prevailed as a major de facto beneficiary. Aside from the convincing jump in share price—up $1.04 to $6.38/share (↑19.48%)—the company benefited in ways perhaps not immediately apparent. We explain further.

To briefly recap, cannabis sector price action went parabolic on news that Constellation Brands Inc. agreed to acquire 104.5 million shares directly from Canopy Growth Corp., thereby achieving approximately 38 percent ownership when assuming exercise of the existing Constellation warrants. The total monetary value of the transaction is approximately $5 billion CAD, with optionality for an additional $4.5 billion if newly-acquired warrants (outside of ones already in existence) are exercised. This deal is the first 10-figure direct investment in the cannabis history, by far trumping Constellation’s original signature investments back in October 2017 and June 2018.

As a result, Canopy Growth skyrocketed $10.05/share to $42.20 (↑31.26%). After the absolutely dismal sector returns witnessed lately, today’s announcement was apparently the best-kept secret on Bay/Wall St. Short sellers will be licking their wounds for days to come.

Aside from the obvious effect Canopy’s news wielded on sector pricing, for Aurora Cannabis, there’s a significant backstory which shouldn’t be ignored.

Aurora Cannabis CCO Cam Battley discusses the key elements of the Aurora value chain that will equate to a horizontally and vertically integrated global cannabis platform

As we opined yesterday—in a story that achieved significant traction—Aurora Cannabis was nearing a mass inflection point of support. One of the primary tenets of the article was that unrestricted MedReleaf crossover selling—the consensus reason why Aurora Cannabis had been particularly weak since the July 25th transaction date—could be imminently cresting:

“We presume that much of the latent MedReleaf selling pressure has already taken place. Not only have around 172.3 million ACB shares traded hands since July 26th, the incentive to sell keeps abating with each lower closing low. While it’s unclear whether MedReleaf-inspired selling is situated on the western side of the hurricane, we’re confident a sizable portion of the 375 million unlocked shares weren’t destined for post-transaction liquidation anyway.”

Not only has another 34.12 million-odd shares traded hands today—bringing aggregate share volume north of 206 million shares since the transaction date—prices held firm all day. There was very little divergence from its peers—especially with nearest rival Canopy Growth. Essentially, prices meandered upwards in tandem and effectively closed within the upper quadrant of today’s closing high.

That’s a noteworthy thing folks, because today provided the ideal session for determined MedReleaf crossover sellers to square positions without roiling the market: volume exploded to the 3rd highest levels in six months, ACB skirted twenty percent gains for much of the session, and sector sentiment was positively bubbly.

Put another way, if crossover selling was really so onerous, then why didn’t Aurora Cannabis end the session with materially truncated gains? Perhaps something akin to an eight, ten or twelve percent increase. Why didn’t ACB begin diverging with Canopy once the initial “shock & awe” wore off? I cannot think of a better day for such divergence to materialize if the enormous latent selling boogeyman retail investors fear was actually in control. Yet, that’s not what happened.

Company Last Change % Change Volume Market Cap Canopy Growth Corporation 32.11 7.49 30.42% 35,409,768 7,080,756,333 Aphria Inc. 10.51 1.79 20.53% 10,221,448 2,438,377,111 Aurora Cannabis Inc. 6.38 1.04 19.48% 34,121,931 6,056,957,562 CannTrust Holdings Inc. 7.77 0.94 13.76% 1,749,134 807,638,586 Cronos Group Inc. 6.38 0.73 12.92% 7,493,562 1,128,657,958 The Hydropothecary Corporation 4.65 0.53 12.86% 5,672,404 921,958,364 Newstrike Brands Ltd. 0.51 0.05 10.87% 3,034,223 282,609,964 OrganiGram Holdings Inc 5.06 0.48 10.48% 1,008,255 631,350,252

Seems like the 375 million pound monster may be morphing into a paper tiger.

Final Thoughts

Despite today’s positive price action, I’m not suggesting remaining latent MedReleaf crossover selling is over. Surely, there’s a material throng of newly-minted shareholders willing to offer shares should cannabis sector winds blow in the wrong direction. But how is that situation different from any other public company? Aurora Cannabis’ under-performance was always about motivated crossover selling (weak-hand selling at any cost) and associated short-sellers exploiting a likely outcome. Once the former pillar is removed, the latter has no cover.

That’s why there’s a good chance Aurora’s run of extreme under-performance is coming to an end. Not only did today’s high-volume bullish impulse steer a significant cadre of motivated MedReleaf sellers to the sidelines, it flipped the whole short-selling apparatus on its head. Instead of acting as an anchor on price, remaining shorts will likely act as tailwind buyers—at least in the near term. That doesn’t mean Aurora can or won’t go lower; it means that performance should steer more in-line with sector performance, whatever it may be.

While the company’s share structure remains immense by industry standards, I’m fairly confident the “dilution storm” has mostly passed. After all, dilution cuts both ways in the absence of motivated or compelled selling. Because it’s harder cutting through a block of ice with a steak knife than a chainsaw.