One of the biggest contrarian plays right now is in vaping. Cannabis company KushCo Holdings (OTC:KSHB) has seen its share price take a beating this year as a result of its exposure to the vaping market. There's a lot of potential for the stock to recover if those concerns disappear, but it's by no means a sure thing. That's why investors need to do a careful analysis of the stock before making an investment decision.

There's still no end in sight to vaping-related deaths

The biggest reason investors are likely hesitant to invest in KushCo today is the company's exposure to vaping. Revenue from vape products made up more than two-thirds (67.4%) of the company's sales in Q4. Vaping-related illnesses are still in the news, and as long as the issue isn't going away, it could have a significant impact on KushCo's financials. As of Dec. 5, 48 people have died as a result of vaping and nearly 2,300 people have been hospitalized. The issue is widespread, with people in every state becoming ill after vaping. And it hasn't been just a U.S. problem, either, there have been similar cases in Canada and the U.K. The good news is that there has been progress, as health officials identified vitamin E acetate as the likely culprit behind the illnesses. 

Until the issue is put to rest once and for all, it could spell bad news for the financials and outlook of a company like KushCo, since vaping is a big part of its business.

A vaping pen

Image source: Getty Images.

KushCo is a long shot to hit breakeven anytime soon

In November, KushCo released its year-end results for fiscal 2019. Revenue of $149 million was up 186% from the previous fiscal year, when its top line totaled $52 million. However, that didn't translate into stronger earnings as KushCo's operating loss grew from $27 million in fiscal 2018 to $45 million this past fiscal year. The company's gross margin fell from 26% to 16%, resulting in just $11 million more in gross profit despite KushCo generating nearly $100 million more in revenue this year than it did in 2018.

Another area of concern for investors is KushCo's cash on hand. The company had just $3.9 million cash on hand as of Aug. 31, which is a big drop from the $13.5 million it had a year ago. From an investor's point of view, a lack of cash is a problem as KushCo could issue more shares to fund its operations, and that would dilute existing shareholders and send the stock price down even lower. 

Vaping-related illnesses only make the situation worse, with KushCo acknowledging that the crisis will have an impact on its financials. In the company's earnings release, KushCo stated: "We believe there will be some top-line softness in the first half of fiscal 2020 related to vape." However, the company is optimistic that in the second half of the year, there will be a recovery. 

KushCo has tried to downplay the impact from vaping, stating that it could lead to consumers simply shifting their purchases around: 

While we have been seeing a slight pullback in sales for the overall vape market, it's important to note that we service the entire regulated cannabis and CBD sector, and as a result, benefit from some consumers potentially shifting to other form factors, such as flower, edibles and pre-rolls. 

The stock is still not a buy despite its low price

KushCo has been one of the hardest-hit marijuana stocks this year, losing more than 70% of its value year to date. For some investors, the ability to purchase shares of the company at well under $2 may present a tempting buying opportunity, but investors should consider much more than just price or valuation when making a long-term investment.

The low value of the stock is indicative of the risk involved and the concern investors have surrounding vaping and the effect the negative press could have on KushCo's sales and profits. It's going to be more difficult for KushCo to come any closer to breakeven as a result of these headwinds, and that's why the stock is not a safe investment today. As low as the stock has gone, it could continue to fall even lower, especially if KushCo's financials take a hit next quarter as a result of falling vape sales.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.