Two top marijuana stocks rocked by downgrades after nearly doubling in post-election euphoria

• The post-election rally in marijuana stocks like Tilray and Aurora Cannabis has proven to be short-lived after both stocks gave up much of their gains on Wednesday.
• Aurora Cannabis plummeted as much as 23% after it said it would dilute shareholders and sell an additional $125 million in stock.
• And on Wednesday, both Aurora Cannabis and Tilray were downgraded to "sell" in a note from Stifel.
• "Economic reality always wins," Stifel said, adding that both companies will be challenged to turn a profit in the quarters ahead as the competitive landscape heats up.
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The potential of marijuana reform hitting the US under a Joe Biden presidency and the passing of legalization initiatives in states like New Jersey and Arizona helped stage a post-election rally of 195% in shares of Aurora Cannabis through Monday.

But that rally has since lost steam as shares of the Canadian-based cannabis producer cratered more than 50% from its Monday high of $14.48 as investor euphoria begins to fade on the potential for widespread marijuana reform due to the potential of a Republican controlled Senate.

The same goes for Tilray. After the marijuana producer surged 84% after the November 3 election through Monday, shares gave up much of their gains, falling 40% from its Monday high of $12.15.

Both Canada-based cannabis companies have faced a tough competitive landscape and deteriorating balance sheets that could put into question both companies' ability to take share in newly opened markets, according to a Wednesday note from Stifel.

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To address those balance sheet concerns, Aurora Cannabis said on Wednesday that it sold 20 million shares at $7.50 per share to raise $150 million, taking advantage of its recent surge.

Aurora Cannabis fell as much as 23% in Wednesday trades as investors soured on the increased equity dilution. Tilray fell as much as 12% in Wednesday trades.

Stifel downgraded shares of both Aurora Cannabis and Tilray to "Sell" from "Hold" on Wednesday, arguing that "economic reality always wins."

Third quarter earnings results suggests "both businesses will be challenged to showcase a profitable template with businesses in-hand while contending with underappreciated balance sheet demands," Stifel explained, adding that neither company "has demonstrated an enduring right-to-win for new market opportunities, particularly in the U.S."

Going forward, liquidity needs will likely drive the downside in shares of Tilray and Aurora Cannabis, Stifel said, adding that only companies "with demonstrated success" will be able to "enjoy sustained investor enthusiasm and the access to capital to capture US category growth."

Despite the recent pullback in shares, both Tilray and Aurora Cannabis are still up 15% and 33% since the November 3 election as of Wednesday trades, respectively. Meanwhile, the Alternative Harvest ETF, which includes more than 30 companies in the industry, is up 10% since the November 3 election.

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