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Is It Time to Buy These 2 Beaten-Down Stocks?

By Eric Volkman - Oct 10, 2019 at 11:21PM

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A marijuana stock and a hungry young IT company were among the market's victims on Thursday.

Thursday was another uphill ride on the stock market for investors. The prices of a vast number of top stocks climbed along with the broader indexes, padding the pockets of shareholders in the right companies.

The following two stocks weren't the right companies, at least on the day. Both dropped notably in trading. Let's see if we can figure out why, and determine whether they should be snapped up at their discounted prices.

Red downward graph line with U.S. currency in the background.

Image source: Getty Images.

Canopy Growth

The nascent cannabis industry is almost certain to explode over the next few years. Countries and U.S. states are going to get more permissive, and with each occurrence of legalization the market will open that much wider. One of the biggest issuers marijuana stock bulls have pinned their hopes on is sector star Canopy Growth (CGC 7.41%).

The bulls' bright, shining future is not the present reality, however. At the moment, there are many players in this game scrambling for market share. But a host of factors -- supply problems, issues with accessing basic financial services, etc., etc., etc. -- is putting a haze over the sector. The prices of marijuana stocks as a class have declined significantly of late.

What didn't help on Thursday was that a member of this gang, HEXO (HEXO 1.67%)unveiled preliminary results for its Q4 of fiscal 2019. HEXO now believes it will post revenue of 14.5 million to 16.5 million Canadian dollars ($10.9 million to $12.4 million) for the quarter.

This is quite some distance down from its previous guidance, not to mention analyst estimates. And since HEXO cited concerns such as anticipated lower market prices and potential restrictions on products permitted for sale in the upcoming "cannabis 2.0" legalization in Canada, the market became spooked about marijuana stocks in general.

As Canopy Growth is one of the poster boys for the sector -- plus its latest results were among the most disappointing among its peers -- it was likely hit with guilt by association on Thursday.

I don't think the stock necessarily deserved the almost 11% hit it took on Thursday -- nearly the worst showing of all weed stocks.

That's not to say, however, that Canopy Growth is now a buy. At the moment, there are too many question marks hanging over the cannabis industry, and even more about how Canopy's being managed. It's probably a good stock to continue avoiding for now.

Cloudflare

There wasn't anything immediately apparent that drove Cloudflare (NET -4.23%) stock down nearly 6% at Thursday's close.

What might be an influence is the end of the quiet period for investment banks involved in the company's September IPO. This happened a few days ago and most of the numerous research notes on Cloudflare stock have been positive.

Most, but not all -- Goldman Sachs and Morgan Stanley are cautious about the stock, both believing it's fairly valued. Somewhat uncomfortably, those two influential banks were among the leads in Cloudflare's IPO syndicate.

Cloudflare is one of a rapidly growing clutch of software-as-a-service (SaaS) providers offering a suite of software products. Perhaps investors are getting concerned that the market is becoming crowded. The company also has two classes of stock, a shareholder structure that has come under plenty of criticism lately.

Cloudflare isn't profitable on the bottom line, but that's par for the course for an ambitious software slinger that has recently gone public. Revenue growth is still robust -- however, costs are rising notably, too.

SaaS is a corner of the IT sector that has vast potential in front of it, but with so many investments to choose from, it might be that investors are getting picky. To me, although it has plenty of potential, Cloudflare hasn't distinguished itself yet in its young life, and has yet to prove it can consistently produce a bottom-line profit. I'd leave the stock alone for now.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
CGC
$4.06 (7.41%) $0.28
Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$74.51 (-4.23%) $-3.29
HEXO Stock Quote
HEXO
HEXO
$0.26 (1.67%) $0.00

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