Canada legalized the recreational use of marijuana for adults in 2018, becoming the second country in the world to do so. However, even after three years of legalization, municipal bans on cannabis retailers have been depriving many communities across the country of brick-and-mortar cannabis stores, while other regions are overcrowded with stores.
It is noteworthy that even without federal legalization, U.S. cannabis market sales outperformed Canada’s in 2020. According to Bernstein analysts, there were approximately $2 billion in cannabis sales in Canada in 2020, while the U.S. hit some $17.5 billion in legal sales. Furthermore, there are high hopes that cannabis will be decriminalized soon in the U.S. Also, the buzz regarding the early legalization of cannabis in Canada is declining, as are the heady valuations of pot companies.
Although the global cannabis market has promising growth prospects, the industry has not progressed as quickly as expected and faces spotty legalization or decriminalization measures. Given this backdrop, the stocks of Canadian cannabis companies Canopy Growth Corporation (CGC), Cronos Group Inc. (CRON), HEXO Corp. (HEXO), and Neptune Wellness Solutions Inc. (NEPT) plunged in price last year. Also, given their weak fundamentals, we think these stocks are best avoided.
Canopy Growth Corporation (CGC)
Headquartered in Smiths Falls, Canada, CGC produces, distributes, and sells cannabis and hemp-based products for recreational and medicinal uses, primarily in Canada, the U.S, and Germany. The company operates through the two broad segments: Global Cannabis and Other Consumer Products. It offers dried cannabis flowers, oil and concentrates, and soft gel capsules.
On Dec.15, CGC announced that it had agreed with Dermapharm Holding SE, a European pharmaceutical company, to divest its subsidiary business, C³ Cannabinoid Compound Company GmbH. This might cause a loss of operative capability for CGC.
On Nov. 17, CGC unveiled its new lineup of flower offerings across its brands. However, it might take some time to gain a significant market share.
For its fiscal second quarter, ended Sept. 30, CGC’s revenue decreased 3.4% year-over-year to CAD145.65 million ($114.13 million). Its adjusted gross margin came in at a negative CAD68.02 million ($53.30 million), down 358% from the prior-year quarter. Its adjusted EBITDA worsened 89.8% from the same period in the prior year to negative CAD162.60 million ($127.41 million).
The negative $0.56 consensus EPS estimate for its fiscal year 2023 indicates a 286.7% year-over-year decrease.
The stock has declined 72.8% in price over the past year and 64.1% over the past six months to close yesterday’s trading session at $8.21.
This bleak outlook is reflected in CGC’s POWR Ratings. The stock has an overall F grade, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
CGC has an F Momentum grade and a Value, Stability, Sentiment, and Quality grade of D. Within the 191-stock Medical – Pharmaceuticals industry, it is ranked #190. The industry is rated F. Click here to see the additional POWR Rating for Growth for CGC.
Cronos Group Inc. (CRON)
Based in Toronto, Canada, CRON is a cannabinoid company that manufactures, markets, and distributes hemp-derived supplements and cosmetic products. The company offers its products through its e-commerce, retail, and hospitality partner channels, under Lord Jones and Happy Dance brand names.
On Dec. 31, shareholder rights litigation firm Schall Law Firm announced that it was investigating CRON for violations of securities laws regarding false or misleading statements and failure to disclose information to investors. The investigation commenced after CRON filed a form with the SEC on Nov. 9, discussing its requirement to restate its previously issued interim financial statements for the three- and six-month periods ended June 30. It is also under investigation by several other law firms.
CRON’s revenue increased 58.1% year-over-year to $15.62 million in its fiscal second quarter, ended June 30. However, its gross loss and operating loss came in at $15.78 million and $60.22 million, respectively, up 440.2% and 73.5% from the prior-year quarter.
Analysts expect CRON’s EPS to remain negative at least until its fiscal year 2022.
Over the past year, CRON’s stock has declined 56% in price to close yesterday’s trading session at 3.81. It has declined 53% over the past six months.
It is no surprise that CRON has an overall F rating, which translates to a Strong Sell on our POWR Rating system.
CRON has an F grade for Momentum, Sentiment, and Quality and a D grade for Growth, Value, and Stability. In the 30-stock Agriculture industry, it is ranked last. The industry is rated D. Click here to see the POWR Ratings for CRON.
HEXO Corp. (HEXO)
HEXO in Gatineau, Canada, markets and sells cannabis in Canada. The company offers its products under the HEXO, Little Victory, House of Terpenes, UP Cannabis, and Original Stash brand names. On November 9, HEXO provided an update of its integration plan following its acquisitions of Redecan, Zenabis Global Inc., and 48North Cannabis Corp. The company announced that it would cease all operations at three production sites in the near term in an effort to centralize its operations.
For its fiscal first quarter, ended Oct. 31, HEXO’s gross profit decreased 275.6% year-over-year to negative CAD31.98 million ($25.06 million). Its loss from operations increased 5,954.2% from the prior-year quarter to CAD155.11 million ($121.54 million), while total net loss and comprehensive loss came in at CAD116.91 million ($91.61 million), up 2,685.5% from the same period prior year.
The Street expects HEXO’s EPS to remain negative at least until its fiscal year 2023.
HEXO’s shares have declined 86% in price over the past year and 87.6% over the past six months to close yesterday’s trading session at $0.6574.
HEXO’s poor prospects are reflected in its POWR Ratings. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system.
HEXO has a Momentum, Stability, Sentiment, and Quality grade of F. It is ranked last in the Medical – Pharmaceuticals industry. Click here to see the additional POWR Ratings for HEXO (Growth and Value).
Neptune Wellness Solutions Inc. (NEPT)
Headquartered in Laval, Canada, NEPT is a health and wellness company that offers turnkey product development and supply chain solutions to business customers in various health verticals, including legal cannabis, hemp, and nutraceuticals.
On Dec. 20, NEPT announced the launch of its new cannabis pre-roll product line in Alberta and Ontario. However, gains from the new pre-roll offerings might not generate any immediate gain for NEPT.
NEPT’s total revenues declined 38.2% year-over-year to CAD15.73 million ($12.33 million) in its fiscal second quarter, ended Sept. 30. This can be attributed to a 38.4% decrease in revenue from sales and services from the prior-year quarter to CAD15.47 million ($12.12 million). Its cash flows from financing activities came in at negative CAD0.20 million ($0.16 million), down 101.2% from the same period prior year.
Analysts expect NEPT’s EPS to stand at negative $0.14 for its fiscal year 2023.
Over the past year, the stock has declined 77.7% in price to close yesterday’s trading session at $0.3863 ($0.39). It has declined 64.6% over the past six months.
NEPT has an overall D rating, which translates to Sell in our POWR Rating system. The stock has a Quality grade of F and a Stability grade of D. It is ranked #9 of 10 stocks in the Medical – Consumer Goods industry.
In addition to the POWR Rating grades we have stated above, one can see NEPT ratings for Growth, Value, Momentum, and Sentiment here.
CGC shares were trading at $8.62 per share on Friday afternoon, up $0.41 (+4.99%). Year-to-date, CGC has declined -1.26%, versus a -1.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More…
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