Cannabidiol (CBD) has gained immense popularity recently owing to its growing use in various sectors, such as healthcare, cosmetics and wellness, food and additives. However, a persistent confusion related to CBD and its benefits, coupled with uncertainty surrounding the legality of hemp-derived supplements, remain a concern for the industry. In fact, the longer the FDA takes to legalize CBD in dietary supplements, the higher the odds of people losing faith in its benefits. This could negatively impact the sales of leading CBD producers.
Although the legalization of cannabis by different states for recreational purposes could be pivotal for the cannabis industry, the use of marijuana has yet to be legalized at the federal level. In addition, given the increase in competition in the cannabis industry, a few stocks have failed to generate sufficient revenues to stay afloat.
Against such a backdrop, we think financially-weak CBD companies Canopy Growth Corporation (CGC), Village Farms International, Inc. (VFF), Charlotte's Web Holdings, Inc. (CWBHF), and Neptune Wellness Solutions Inc. (NEPT) may not be able to show any improvement in their businesses. So, we think it could be wise to avoid these stocks now.
Click here to check out our new Cannabis Industry Report for 2021
Canopy Growth Corporation (CGC)
CGC is a world-leading diversified cannabis and cannabinoid-based consumer product company in Canada. It operates through Cannabis, Hemp and Other Consumer Products, and Canopy Rivers segments. Its products include high-quality dried flower, oil, soft gel capsule, infused beverage, edible, and topical formats, as well as vaporizer devices.
In April, CGC entered a distribution agreement with Southern Glazer’s Wine & Spirits, the world’s pre-eminent distributor of beverage alcohol, for its U.S. portfolio of CBD-infused beverages. Southern Glazer’s established network might help CGC in the coming months, but the distribution expense could be an additional burden on the company’s cash balance.
CGC’s forward EV/Sales currently stand at 17.87x, 186.5% higher than the 6.24x industry average. The company’s 22.73x forward Price/Sales is 209.4% higher than the 7.35x industry average.
Although CGC’s revenue grew by 23% year-over-year to CAD$152.53 million ($126.06 million) in the third quarter, ended December 31, it reported a CAD$829.3 million ($685.40 million) net loss. Furthermore, it generated an operating loss of CAD$553.61 million ($457.55 million) for this period. Its gross margin came in at 16%, representing 1,500 basis point decline over the period.
The stock has declined 42.8% over the past three months. CGC’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CGC is also rated an F in Value and Sentiment, and a D in Stability. Within the F-rated Medical - Pharmaceuticals industry, it is ranked #209 of 227 stocks.
To see additional POWR Ratings for Momentum, Quality and Growth for CGC, click here.
Village Farms International, Inc. (VFF)
Formerly known as Village Farms Canada Inc., VFF is one of the largest and longest-operating greenhouse growers in North America. It operates through three segments: Produce Business, Energy Business, and Cannabis and Hemp Business. The company also regulates a 7.0-megawatt power plant that produces and supplies cannabis products.
In February, VFF exercised a portion of its option to increase its equity investment in Altum International, one of the Asia-Pacific's leading cannabinoid platforms, from 6.6% to 10%. Although the investment could increase VFF’s business opportunities in the Asia-pacific region in the long term, in the near term it could increase the company’s business expenses.
The stock is currently trading at a high valuation. VFF’s forward EV/EBITDA value currently stands at 48.78x, 272.6% higher than the 13.09x industry average. Its forward Price/Sales value stands at 3.54x, 94.8% higher than the 1.81x industry average.
Although VFF’s sales increased 63.2% year-over-year in its fiscal first quarter, ended March 31, it reported a $7.38 million net loss, representing a 276.1% increase from the year-ago value. The company’s adjusted EBITDA decreased 63.6% year-over-year to $404,000. Its loss per share came in at a negative $0.10.
The company’s stock has declined 51.6% over the past three months. VFF’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary rating system.
It also has a D grade for Growth, Sentiment and Stability. Click here to see additional POWR Ratings for VFF (Value, Momentum and Quality).
In the Agriculture industry, it is ranked #24 of 35 stocks.
Charlotte's Web Holdings, Inc. (CWBHF)
CWBHF is the world’s leading brand by market share in the production and distribution of innovative hemp-based cannabidiol wellness products. The company offers products in the following categories: tinctures, capsules, gummies, topicals, and pet products. It sells its products through its website, third party e-commerce websites, distributors, as well as various brick and mortar retailers.
Last month, CWBHF revealed that three of its proprietary hemp cultivars were approved for registration on Health Canada's List of Approved Cultivars ("LOAC") for outdoor cultivation in Canada. In addition, the company plans to bring two early maturing hemp varieties to Canada named "Duchess" and "Ambassador". However, due to current laws on bulk importing of U.S. grown hemp, CBD, or related products into Canada, it might be difficult for the company to make its products easily available.
In the first quarter, ended March 31, 2021, CWBHF’s gross profit declined 9.3% year-over-year to $13.7 million. Its operating loss came in at negative $10.3 million, representing a 24.1% increase from the year-ago value. Its reported net loss and comprehensive loss increased 20.9% to $13.9 million.
Over the past year, CWBHF’s stock has declined 20.8%. Its weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. It also has a D grade for Quality and Sentiment, and a C grade for Momentum. Of the 227 stocks in the Medical - Pharmaceuticals industry, it is ranked #139.
We have also graded CWBHF for Growth, Value and Stability. click here to see them.
Neptune Wellness Solutions Inc. (NEPT)
NEPT is a diversified and fully integrated global health and wellness company focused on natural, plant-based, sustainable and purpose-driven lifestyle brands: Forest Remedies and Ocean Remedies, Neptune Wellness, Mood Ring, and OCEANO3. The company offers product development and supply chain solutions along with extraction and purification services. It also has a collaboration agreement with International Flavors & Fragrances Inc. to co-develop hemp-derived CBD products.
In February, the company declared that an arbitrator resolved a commercial dispute that existed between the company and Azpa Pharmaceuticals Pty. Ltd by rendering a decision in favor of NEPT. Previously, Azpa was responsible for distribution of specific Neptune products in Australia and New Zealand. Despite being favored, this dispute might affect NEPT’s sales in specific regions because its distribution channel has been disrupted.
NEPT’s forward EV/Sales currently stands at 4.03x, 86.4% higher than the 2.16x industry average. Its 5.83x forward Price/Sales is 225.3% higher than the 1.79x industry average.
The company’s revenue has decreased 63.8% year-over-year to $3.33 billion for the third quarter, ended December 31, 2020, while its gross profit came in at negative $8.91 billion during the period. Its adjusted EBITDA declined 342.2% year-over-year to negative $8.49 billion. The company’s net loss was $73.8 billion, compared to $5.60 billion in net income in the same period. NEPT reported a net loss per share of $0.59, compared to an EPS of $0.06 a year ago.
The stock has declined 52% over the past year. NEPT’s bleak 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 an F grade for Quality, and a D grade for Stability and Sentiment. Of the 12 stocks in the Medical - Consumer Goods industry, NEPT is ranked #12.
Click here to see the additional POWR Ratings for NEPT. (Momentum, Growth and Value).
Click here to check out our new Cannabis Industry Report for 2021
CGC shares were trading at $23.37 per share on Tuesday afternoon, up $0.22 (+0.95%). Year-to-date, CGC has declined -5.15%, versus a 11.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Samiksha Agarwal
Samiksha Agarwal has always had a keen interest in financial markets. This has led her to a career as a financial journalist. Through her extensive knowledge of fundamental analysis, her goal is to help investors identify untapped investment opportunities in the stock market.
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