Just because a stock is down substantially doesn't mean it's worth investing in at its current levels. Many companies will rebound from the ongoing downturn as the economy improves, but in all likelihood, many others will continue to struggle. Corporations in the latter category are best avoided.
And on that note, let's look at two specific examples: Pot grower Canopy Growth (CGC -1.01%) and vaccine maker Vaxart (VXRT 0.91%). These two stocks have dropped by more than 70% in the past 12 months. Here's why a rebound isn't in the cards for either one.
1. Canopy Growth
Investors thought they had struck gold when recreational uses of cannabis became legal for adults in Canada in 2018. Many rushed to invest in companies such as Canopy Growth, which has long been considered one of the leaders in the field. The pot grower was able to attract a $4 billion investment from Constellation Brands -- a leading producer of alcoholic beverages -- in November 2018.
Cannabis companies had trouble raising funds due to the nature of their business activities. That's why Canopy Growth's partnership with a Fortune 500 company with big pockets was a big deal. However, things haven't turned out that well for Canopy Growth. On the one hand, it is not entirely the company's fault. Even though various forms of cannabis (including edibles and cannabis-infused beverages) have been legal for a few years now, navigating the market in Canada hasn't been easy.
Early on, obtaining cannabis retail licenses was a nightmare, which limited the number of retail stores and hindered companies' ability to reach customers. Further, the Canadian market has become highly competitive, leading to pricing pressure and continuing net losses for companies, including Canopy Growth. That's not to mention that the illegal cannabis market, which, by definition, does not play by the rules, is still taking up some of the sales that would otherwise go to Canopy and its peers.
The cannabis producer recently announced the divestiture of its retail operations in Canada, partly due to these troubles. Canopy Growth did not disclose the financial terms of this move. Earlier this year, the company enacted another round of cost-cutting initiatives, which included layoffs, all in an attempt to become profitable.
Canopy Growth badly needs this plan to work. While the company continues to grow its revenue, its top-line growth rates have plunged, and it is even deeper in the red than it was before the pandemic.
CGC Revenue (Quarterly) data by YCharts
With slower revenue growth, worsening net losses, and stiff competition in a market with relatively low barriers to entry, the pot grower has to shake things up. Canopy Growth's profitability goals are laudable. Few (if any) Canada-based cannabis companies have been able to be consistently in the green on the bottom line. But given all the troubles the company has encountered, investors should refrain from getting in on Canopy Growth at least until it proves that it can deliver solid and consistent profits.
2. Vaxart
Vaxart is a biotech company that focuses on developing oral vaccines. The company is currently working on a candidate that targets COVID-19. An oral vaccine for the coronavirus would be a big deal. Even many who don't fear needles would prefer to take the pill if the result is the same: robust protection against the virus.
However, there are several problems. First, even current leaders in the coronavirus vaccine market are struggling. That's because many investors think the demand for these products will drop substantially starting next year. The pandemic isn't over yet, but the proportion of the world's population that has received at least one dose of a vaccine is 68%.
Sure, the booster market could be a long-term opportunity to exploit. It looks increasingly likely that millions of people will seek to get inoculated every year. That particularly applies to those most at risk of severe disease, including the elderly. But Vaxart will first have to prove its candidate is safe and effective before it can profit from this opportunity.
And as things stand, the company is far from having done so. In fairness, the company's candidate recently demonstrated positive results in a phase 2 clinical trial. That's great. But it still has a long road ahead. Phase 3 studies typically last between one and four years.
If Vaxart were to start a late-stage study today, it wouldn't earn approval until mid-2024 at best. That's assuming the drug demonstrates solid results, which is by no means a foregone conclusion at this point. Meanwhile, Vaxart generates little to no revenue and is consistently unprofitable. And none of the company's other drug candidates have yet reached a phase 3 study. It ended the second quarter with $131.5 million in cash and cash equivalents, representing a sequential decrease of about 16%.
Management thinks the company has enough funds to last until the second half of 2023. That's about a year, and Vaxart's expenses could increase if it starts a late-stage clinical trial for its COVID-19 vaccine candidate. Investors should expect the biotech to seek ways to generate additional funds, and perhaps resort to dilutive methods of financing. That could put additional pressure on the company's stock.
In my view, the company's oral vaccine platform looks exciting, and it is worth keeping an eye on the company. However, it is far too early to put your hard-earned money in Vaxart. There are plenty of biotech stocks out there that look like much safer and better options at this point.
