The marijuana industry has been attracting significant investor attention lately as the push for federal-level legalization gains momentum and the stigma surrounding the use of pot declines. As of June 2021, recreational marijuana was legal in 19 states.
Despite overall optimism, pot legalization at the federal level still has few hurdles to cross. Last month, U.S. Senate Majority Leader Chuck Schumer released draft legislation of the Cannabis Administration and Opportunity Act, which would remove marijuana from the Controlled Substances Act. However, given that the bill does not yet have sufficient votes to push it through the Senate because some Republicans and moderate Democrats oppose the decriminalization of marijuana, the prospects of federal-level legalization look uncertain at best. Also, it is still unclear whether President Biden would sign the bill into law.
Amid this uncertainty, we think investors should avoid cannabis stocks with weak fundamentals and growth prospects. Canopy Growth Corporation (CGC), Aurora Cannabis Inc. (ACB), and Neptune Wellness Solutions Inc. (NEPT) are examples of cannabis concerns that are struggling to stay afloat due to their weak financials. Therefore, we believe these stocks are best avoided now.
Click here to check out our Cannabis Industry Report for 2021
Canopy Growth Corporation (CGC)
Headquartered in Smiths Falls, Canada, CGC produces and supplies hemp-based products and cannabis for medical and recreational purposes in the United States, Canada, and Germany. It sells softgel capsules, cannabis flowers, and oils and concentrates under Spectrum Therapeutics, First & Free, Tweed, Quatreau, and DNA Genetics CraftGrow brands.
In June, CGC completed the acquisition of all the common shares of The Supreme Cannabis Company. The company issued approximately 9,013,400 Canopy shares and made a cash payment of roughly $84,096.89. Although the acquisition could strengthen CGC’s position in the Canadian recreational market, it could negatively impact its cash balance.
CGC’s net revenue has increased 37.1% year-over-year to CAD546.65 million ($436.38 million) in its fiscal year ended March 31, 2021. However, the company’s loss from operations came in at CAD1.24 billion ($992.56 million), and its net loss amounted to CAD1.74 billion ($1.39 billion). Its comprehensive loss rose 82.7% year-over-year to CAD2.0 billion ($1.6 billion).
The stock has declined 23.7% year-to-date and 54.9% over the past six months. And it is currently trading 66.8% below its 52-week high of $56.50, indicating short-term bearishness.
CGC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
CGC has a C grade for Growth, D for Stability, and an F for Value. Of the 220-stocks in the F-rated Medical – Pharmaceuticals industry, it is ranked #218.
In addition to the POWR Ratings grades we’ve just highlighted, one can see the CGC ratings for Stability, Momentum, and Sentiment.
Aurora Cannabis Inc. (ACB)
ACB is a Canada-based vertically integrated producer and distributor of medical cannabis products worldwide. The company is engaged in cannabis breeding, genetics research, retail distribution, and home cultivation of cannabis. In addition, ACB sells herb mills for using CanniMed herbal cannabis products, vaporizers, and cannabis oil and capsules.
In June, ACB completed the restructuring of its balance sheet. The repayment of its term loan resulted in interest and scheduled principal repayment reductions of roughly $25 million over the next year. The company also plans to issue up to $300 million of its common shares using its at-the-market equity program.
In the third quarter, ended March 31, 2021, ACB’s total revenue declined 24.5% year-over-year to CAD55.16 million ($44.21 million). The company reported a CAD85.46 million ($68.5 million) gross loss, compared to a CAD19.65 million ($15.75 million) gross profit in the prior-year period. Its loss from operations grew 71.4% year-over-year to CAD142.96 million ($114.62 million). ACB’s net loss increased 18.2% year-over-year to CAD164.65 million ($132.01 million) over this period.
A $197.48 million consensus revenue estimate for its fiscal period ended June 30, 2021, represents a 5.8% decrease year-over-year. The consensus EPS estimate is expected to remain negative for the fiscal period ending June 30, 2022. Also, the stock failed to beat consensus EPS estimates in each of the trailing four quarters. Over the past month, ACB’s has declined 17.9%. It is currently trading 62.1% below its 52-week high of $18.98, which it hit on February 10.
ACB’s weak prospects are apparent in its POWR Ratings also. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system. ACB also has a D grade for Stability and Quality, and an F for Sentiment. In the Medical – Pharmaceuticals industry, the stock is ranked #219.
To see additional POWR Ratings for Growth, Value, and Momentum for ACB, click here.
Neptune Wellness Solutions Inc. (NEPT)
NEPT is an integrated health and wellness company based in Canada. The company manufactures health and wellness products, such as hemp-derived products, in various delivery forms, such as liquids, capsules, vape pens, and omega-3. In addition, it provides supply chain solutions to customers in health and wellness verticals, such as legal cannabis and hemp.
In May, Levi & Korsinsky, LLP, The Gross Law Firm, Jakubowitz Law, and several other law firms filed securities fraud class action lawsuits against NEPT on behalf of its shareholders. These ongoing lawsuits could negatively impact NEPT’s share price in the upcoming months.
NEPT’s revenue declined 28.4% year-over-year to $6.8 million in the fourth quarter ended March 31, 2021. Its gross profit loss came in at $24.8 million compared to a $1.1 million gross profit lossin the prior-year period. The company reported a $60.3 million net loss for this quarter, compared to $39.2 million in the fourth quarter of 2020. Its adjusted EBITDA came in at a negative $24.7 million over this period.
NEPT failed to beat the consensus EPS estimates in each of the trailing four quarters. Moreover, its EPS is expected to remain negative in its fiscal periods ending March 2022 and March 2023. The stock has declined 71.9% over the past year and is currently trading 78.1% below its 52-week high of $3.60.
NEPT’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our POWR Ratings system. NEPT has a D grade for Momentum and Stability, and an F for Sentiment. In the A-rated Medical – Consumer Goods industry, the stock is ranked last of 10 stocks.
In total, we rate NEPT on eight different components. Beyond what we stated above, we have also given NEPT grades for Value, Quality, and Growth. Get all the NEPT ratings here.
Click here to check out our Cannabis Industry Report for 2021
CGC shares rose $0.35 (+1.83%) in premarket trading Monday. Year-to-date, CGC has declined -22.28%, versus a 19.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…
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