The global spread of the novel coronavirus has shaken U.S. stock markets to their core. The nearly 10-year-long bull market briefly entered bear market territory at one point last week. What's more, this marketwide weakness appears poised to continue for a while longer because of the potential impact on corporate earnings in the months ahead. Investors, therefore, will definitely want to pick their equities with an extra amount of care and forethought for the remainder of 2020.
I plan on avoiding three particular healthcare stocks on the heels of this outbreak. The three names I've crossed off my buy list are Aurora Cannabis (NYSE:ACB), HEXO (NYSE:HEXO), and Inovio Pharmaceuticals (NASDAQ:INO). Here's why.
Aurora Cannabis: No bottom in sight
Aurora Cannabis was once the industry's crown jewel. The company had one of the most diverse businesses, a vast international footprint, a top-flight production capacity, and the backing of thousands of enthusiastic retail investors. Since hitting this high-water mark roughly a year ago, however, Aurora has had to slash expenses, idle key growth facilities, and change its brain trust. Even then, the company still hasn't solved its two most fundamental problems: the ongoing structural deficiences in the Canadian legal cannabis market and its long-term financial viability. But the worst could be yet to come.
After taking a 45.8% hit to its share price during just the first nine weeks of 2020, Aurora's stock now sits at a worrisome $1.17. The big deal is that Aurora's stock is inching ever closer to a delisting notice. Complicating matters further, the company may have to continue selling stock to raise capital, which is far from ideal given its current share price. In short, Aurora appears headed for a reverse split, perhaps before midyear.
On the bright side, the company does have an interesting mix of assets that could be used to mount a comeback. So a reverse split shouldn't be viewed as a stepping stone toward bankruptcy in this case. That being said, Aurora is going to have to pay for the sins of its prior management team at some point, and it will probably have to do so when the U.S. stock markets are in a rather bad mood.
HEXO: On the outside looking in
Quebec-based grower HEXO has shed 80% of its value over the past 12 months. Even so, it could be about to fall even further, for a couple of reasons. The first major headwind is the simple fact that HEXO doesn't have a great competitive position within the Canadian cannabis market.
Despite acquiring Newstrike Brands and pairing up with Molson Coors Brewing to develop cannabis-infused beverages, the company is projected to be cash flow negative for the next two years at a minimum. The harsh truth is that there are far too many mouths to feed in the Candian cannabis market, and HEXO doesn't have the cash runway to hang with its bigger competitors.
Second, HEXO is also bumping up against the minimum bid requirement for the New York Stock Exchange (NYSE). With its shares now at a $1.09, HEXO may soon have to decide whether to delist from the NYSE or execute a reverse split to meet the minimum bid requirement of $1 per share. In short, there's no compelling reason to think this struggling cannabis stock can turn things around anytime soon.
Inovio: Too much hype
Inovio Pharmaceuticals, a DNA-based vaccine developer, has seen its stock go parabolic over the past few weeks in response to the coronavirus outbreak. The brief backstory is that Inovio announced that it developed a vaccine candidate, dubbed INO-4800, against the virus in just three hours and that human trials should begin shortly.
As this virus has fanned out to almost every continent and killed almost 4,000 people, there is a lot of excitement about a possible vaccine for obvious reasons. Still, Inovio's skyrocketing share price is undoubtedly based on nothing more than pure speculation. That's important to understand, because it means that Inovio's shares could give back all of these stately gains in the blink of an eye.
Now, Inovio's shares may continue ripping higher in the days and weeks ahead. I don't doubt that's possible for one second, because of the growing fear that this virus may evolve into a seasonal threat. But the company's $1.42 billion market cap is hard to justify nonetheless. Inovio has never won a regulatory approval for any of its vaccine candidates, and this latest infectious disease outbreak will more than likely evaporate before the company ever gets INO-4800 into a pivotal trial. Put simply, Inovio is essentially a day trader vehicle as things stand now, which isn't an attractive set up for the buy-and-hold crowd.