The cannabis industry generated strong momentum in 2020. As people sort to deal with heightened stress level or anxiety while on lockdown at home for fear of contracting COVID-19, many stocked up on CBD products.
Canadian cannabis companies have an established domestic market. Many of them are now planning to venture into the United States through inorganic growth. With a new U.S. Presidential administration in office, investors anticipate continuing and widespread legalization of recreational marijuana usage in the United States.
However, the industry still has a long way to go and many underlying issues to overcome. While many pot producers have announced a series of growth initiatives, they often lack sufficient capital to support those initiatives. Most of these companies are also suffering from high debt levels.
Four such stocks are Cronos Group Inc. (CRON), HEXO Corp. (HEXO), Organigram Holdings Inc. (OGI), and Juva Life Inc. (JUVAF). We think these stocks are risky investments at this juncture and investors should avoid them for now.
Cronos Group Inc. (CRON)
CRON is a cannabinoid company involved in manufacturing, marketing and distributing hemp-derived supplements and cosmetic products through hospitality partners, ecommerce, and retail. The company operates in Canada, the United States and other countries.
During the fourth quarter, ended February 26, 2021, CRON’s revenue soared 133% year-over-year to $1.7 billion. Its EPS for the quarter declined to $0.19 from $1.62 posted in the same period last year. The company witnessed an expansion in its operating loss due to a rise in sales and marketing costs incurred for the launch of new U.S. hemp-derived CBD products under the Lord Jones™ and Happy Dance brands.
The company reported a loss due to an impairment charge and an increase in general and administrative expenses and an increase in R&D spending. Its cash at the end of the quarter fell to $1.1 billion from $1.2 billion in the same period last year.
CRON’s valuation doesn’t justify its fundamentals. Its trailing ev/sales of 46.73x compares to the industry average 7.91x.
CRON has surged 36.6% year-to-date to close Friday’s session at $9.48. Over the past six months, the stock has rallied 78.9%.
CRON’s gloomy prospects are reflected in its POWR Ratings. The stock has an overall rating of F, which equates to Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CRON also has an F grade for Sentiment and Quality, and D for Stability, Value and Growth. In the C-rated Agriculture industry, it is ranked #31 of 32 stocks.
In addition to the POWR Ratings grades I've just highlighted, you can see CRON ratings for Momentum here.
HEXO Corp. (HEXO)
HEXO is primarily involved in the production, marketing, and selling cannabis in Canada. The company sells dried cannabis under the brand Time of Day and H2, Decarb, an activated fine-milled cannabis powder product, and Elixir, a cannabis oil sublingual mist product line.
During the first quarter ended October 31, 2020, its net revenue surged 103.2% year-over-year to $29.5 million. Its loss per share narrowed to $0.01 from $0.23 posted in the same period last year. HEXO plans to acquire Zenabis Global Inc. in an all-stock deal valued at about C$235 million. The acquisition would enable HEXO to gain a foothold in the European medical cannabis market via Zenabis’ local partner in Malta.
However, analysts are not too optimistic about the success of HEXO’s move. Jefferies analyst Owen Bennett said, “We do wonder if this has been overly driven by short termism, and from a strategic perspective it does not really get us excited.”
The stock looks overvalued considering its financials. Its forward ev/ebitda of 268x is much higher than the industry average 16.50x.
Over the past year, HEXO soared 74.5% to end Friday’s trading session at $6.42. During the past six months, the stock rallied 136%.
HEXO’s dismal prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, which equates to Strong Sell in our proprietary rating system. HEXO also has an F grade for Value and Quality. It is ranked #11 in the Medical - Consumer Goods industry.
Click here to see the additional POWR Ratings for HEXO ( Growth, Momentum, Stability, and Sentiment).
Organigram Holdings Inc. (OGI)
OGI deals with the production and selling of cannabis and cannabis-derived products in Canada. Through its Edison Reserve, Edison Cannabis Co., ANKR Organics, and Trailblazer brands the company offers cannabis flowers, extracts, edibles and oils, beverages, and other cannabis products. OGI also offers vaporizers for the medical marijuana market.
During the first quarter, ended November 30, 2020, OGI’s net revenue fell 23% over the year to $19.3 million. The revenue was impacted by substantially lower wholesale revenue from licensed producers and a lower average selling price. Its loss per share widened to $0.17 versus $0.01 posted in the prior year period.
The company is also grappling with high production costs due to diseconomies of scale. Its production during the quarter was low because there was unabsorbed fixed overhead. Its balance sheet doesn’t look healthy either. The current portion of its long-term debt surged 427% at the end of the quarter.
Though OGI has begun revamping its production to mitigate its losses, its future looks bleak. It has launched 53 new stock-keeping units (SKUs) since July 2020As a part of its product portfolio revitalization. OGI also has its focus on high-margin Edison dried flower offerings. However, it is still uncertain if there will be enough demand for these products or if that demand would translate to revenue growth.
A consensus revenue estimate for the quarter ended February 28, 2021 is $16.6 million, representing a 4.3% decrease year-over-year. Meanwhile, its loss per share is likely to expand to $0.03.
The stock is also quite overvalued. In terms of forward p/s, the stock is trading at 11.86x, higher than the industry average 9.87x.
On the year-to-date basis, OGI soared 28.2% to end Friday’s trading session at $2.68. Over the past six months, the stock has rallied 133%.
OGI’s dismal prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. OGI also has a Value, Sentiment, and Quality rating of F. In the F-rated, 240-stock Medical - Pharmaceuticals industry, it is ranked #240.
Click here to see the additional POWR Ratings for OGI (Momentum, Growth and Stability)
Juva Life Inc. (JUVAF)
JUVAF is a vertically integrated medical and recreational cannabis company. Juva Cultivation, Juva Research, Juva Retail, and Juva Delivery are the segments under which it operates. JUVAF ended Friday’s trading session at $1.03, gaining 5.4% over the past year. JUVAF aims to be a pioneer in creating “cannabis therapeutic” data for medical cannabis market in the United States.
The company started its operations in 2019 and has unique offerings but it is still in its nascent stages. Hence, there is a lot of ambiguity about its prospects in the near term.
JUVAF’s uncertain prospects are reflected in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary rating system. It has a C for Growth, Stability, and Sentiment. It is ranked #124 in the Medical – Pharmaceuticals industry.
In total, we rate JUVAF on eight different levels. Beyond what we stated above we also have given JUVAF grades for Value, Momentum, and Quality. Get all the JUVAF ratings here.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Want More Great Investing Ideas?
9 “MUST OWN” Growth Stocks for 2021
How to Ride the 2021 Stock Market Bubble
5 WINNING Stocks Chart Patterns
K.I.S.S. for the March Stock Market
CRON shares were trading at $9.48 per share on Monday afternoon, down $0.00 (0.00%). Year-to-date, CRON has gained 36.60%, versus a 2.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education.
The post 4 Canadian Cannabis Stocks to Avoid in March appeared first on StockNews.com