The U.S. cannabis industry has been gaining steam due to the legalization of recreational marijuana in several states and a change in consumer preference toward innovative cannabis products. However, the health risks associated with cannabis use in adolescents raise questions related to marijuana consumption. Furthermore, the U.S. Food and Drug Administration has to date not approved cannabis as a treatment for cancer or any other medical condition.

Several challenges, including restricted access to capital and a stigma surrounding cannabis use, could impede the industry’s growth. On the other hand, with cannabis laws gradually becoming more favorable for the cannabis industry, more players are entering the space, making the industry increasingly competitive. Therefore, not all cannabis operators are well-poised to withstand the challenges and survive in the heavily competitive market.

Given this backdrop, it could be wise to steer clear of cannabis stocks HEXO Corp. (HEXO), Flora Growth Corp. (FLGC), and Neptune Wellness Solutions Inc. (NEPT), which possess weak fundamentals. These stocks declined more than 15% in price in October.

Click here to check out our Cannabis Industry Report for 2021

HEXO Corp. (HEXO)

HEXO is a Canada-based consumer packaged goods cannabis company that creates and distributes products for the cannabis market. The company serves the adult-use market through its HEXO, HEXO Plus, Up, Bake Sale, Namaste, REUP, and Original Stash brands, and the medical market through its HEXO brand. In addition, it provides cannabis beverages under Little Victory, House of Terpenes, XMG, Mollo, and Veryvell brand names.

In August, HEXO acquired all the outstanding shares of the entities of Redecan, Canada’s privately-owned licensed cannabis producer. HEXO paid the selling shareholders of Redecan $400 million in cash. With this acquisition, HEXO may strengthen its position in the cannabis industry, but the transaction could negatively impact its cash balance in the near term.

HEXO’s total revenue increased 42.8% year-over-year to CAD38.76 million ($31.32 million) in its fiscal fourth quarter, ended July 31, 2021. However, the company’s operating expenses amounted to CAD63.12 million ($50.99 million). Its loss from operations came in at CAD59.88 million ($48.38 million). Also, the company’s net loss and comprehensive loss amounted to CAD67.96 million ($54.91 million) for the period.

HEXO’s EPS is expected to remain negative next year. The company has failed to beat the consensus EPS estimates in three of the trailing four quarters. The stock has declined 22.5% in price over the past month and 61.7% year-to-date.

HEXO’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

The stock has an F grade for Stability, Sentiment, and Quality. We’ve also graded HEXO for Growth, Momentum, and Value. Click here to access all HEXO’s ratings. HEXO is ranked #193 of the 202 stocks in the F-rated Medical – Pharmaceuticals industry.

Flora Growth Corp. (FLGC)

Based in Toronto, Canada, FLGC is an internationally focused cannabis company that cultivates and processes natural, medicinal-grade cannabis oils and cannabis-derived medical and wellbeing products. In addition, it manufactures and sells hemp textiles products that serve the medical and clothing industries. Mambe, Mind Naturals, Almost Virgin, Flora Lab, and Stardog are some of the company's popular brands.

During the six months ended June 30, 2021, FLGC’s revenue came in at $2.1 million. However, the company’s operating expenses amounted to $7.2 million. Its net loss was $5.3 million for the period.

FLGC’s EPS is expected to remain negative in the current year. The stock has declined 19.3% in price over the past month and 42.9% over the past three months.

FLGC’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. Also, the stock has a D grade for Stability, and a C grade for Momentum and Quality.

In addition to the POWR Rating grades I’ve just highlighted, one can see FLGC’s ratings for Growth, Value, and Sentiment here. FLGC is ranked #23 of 31 stocks in the D-rated Agriculture industry.

Neptune Wellness Solutions Inc. (NEPT)

Incorporated in 1998, NEPT is a Laval, Canada-based fully integrated health and wellness company that produces natural, plant-based consumer products. The company provides turnkey product development and supply chain solutions, including legal cannabis and hemp, nutraceuticals, and consumer packaged goods. Biodroga Neutraceuticals, Forest Remedies, Ocean Remedies are some of the brands under which NEPT markets its products.

During the first quarter, ended June 30, 2021, NEPT’s net loss increased 101.8% year-over-year to $23 million. The company’s gross profit loss came in at $2.9 million. Also, its adjusted EBITDA loss amounted to $15.9 million for the period.

NEPT’s EPS is expected to remain negative in its fiscal period ending March 2022. The company has failed to beat the consensus EPS in three of the trailing four quarters. And over the past month, NEPT’s stock has declined 12.5% in price. The stock has retreated 66.7% year-to-date.

NEPT’s POWR Ratings reflect its poor prospects. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. NEPT has an F grade for Quality, and a D grade for Stability. In the B-rated Medical – Consumer Goods industry, it is ranked last of 13 stocks.

Click here to see the additional POWR Ratings for NEPT (Momentum, Value, Sentiment, and Growth).

Click here to check out our Cannabis Industry Report for 2021

HEXO shares were trading at $1.37 per share on Tuesday morning, down $0.05 (-3.19%). Year-to-date, HEXO has declined -62.77%, versus a 24.60% rise in the benchmark S&P 500 index during the same period.

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research.

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