The cannabis revolution is gaining traction in the United States as the legalization of recreational and medical cannabis picks up steam at a dramatic pace. So far, 18 states and Washington, DC, have legalized the use and cultivation of recreational cannabis. So, approximately 44% of the U.S. population now lives in a state where recreational use of marijuana is legal, or soon will be.

However, pot legalization at the federal level still faces a roadblock. Despite the fact that the MORE Act, which was reintroduced last month by House Judiciary Committee Chairman Jerry Nadler, to decriminalize cannabis at the federal level is likely to be passed by the Democratically controlled House of Representatives, the Senate’s decision position remains uncertain. And since the chamber’s disagreement could stall the federal legalization process further, the cannabis industry is expected to witness significant stock market volatility in the coming months.

Given the uncertainty surrounding  federal legalization of cannabis, we think it’s best to avoid cannabis companies that don’t possess good financial health. To that end, we believe HEXO Corp. (HEXO), 22nd Century Group Inc. (XXII), and Akerna Corp. (KERN) are best avoided now.

Click here to check out our Cannabis Industry Report for 2021

HEXO Corp. (HEXO)

Canada-based HEXO is a producer, and seller of adult-use and medical cannabis products under the brand name HEXO. The company has a production capacity of roughly 300,000 square feet. In addition,  the company sells dried cannabis under the Time of Day and H2 lines brand names.

This month, HEXO announced the completion of a deal to buy its first U.S. manufacturing site in Fort Collins, Colorado, through a fully owned subsidiary in the United States. This transaction could  help HEXO to extend its reach in the United States, but it will negatively impact its cash balance for the time being.

HEXO reported a C$16.09 million ($13.06 million)operating loss in the fiscal third quarter, ended April 30, 2021. The company also reported a C$20.71 million ($16.81 million) net loss, representing a 6.1% increase year-over-year. Also, its  adjusted EBITDA came in at negative C$10.78 million ($8.75 million) over this period. The stock has declined 18.8% over the past month and 8% over the past three months.

HEXO’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which translates to Strong Sell in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.

The stock is also rated an F grade in Stability, Value, and Sentiment. Within the F-rated Medical – Pharmaceuticals industry, it is ranked #224 of 225 stocks.

To see the additional POWR Ratings for Growth, Momentum, and Quality for HEXO, Click here.

22nd Century Group Inc. (XXII)

XXII is a Clarence, N.Y.-based biotechnology company that  produces plant-based solutions for the life science, consumer goods, and pharmaceutical industries. The company is also working in collaboration with Keygene N.V. to create hemp/cannabis plants with superior cannabinoid profiles and other agronomic qualities for medicinal, therapeutic, and agricultural uses.

This month, XXII closed its sale of 10 million shares of stock, raising  gross proceeds of $40 million. Although this equity financing could  help the company to procure additional intellectual property rights and fund its research and development expenses, it could negatively impact  shareholder returns in the near term.

XXII’s revenue decreased by 3.6% year-over-year to $6.81 million in the first quarter, ended March 31, 2021. This was due  primarily to  lower sales volume. Its operating loss came in at $5.17 million, representing a 24.8% year-over-year increase.  Also, its operating expense came in at $5.82 million, representing a 31.4% increase  from the year-ago value. The company’s net loss increased 24.9% year-over-year to $5.03 million, while its loss per share amounted to $0.03 during this period.

XXII’s poor prospects are also apparent in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system.

The stock also has an F grade for Value and Quality. Click here to see the additional POWR Ratings for XXII. (Growth, Stability, Sentiment and Momentum).

XXII is ranked #472 of 492 stocks in the F-rated Biotech industry.

Akerna Corp. (KERN)

KERN is a technology company that specializes in cannabis compliance and inventory management. Its tools help cannabis companies and government agencies manage the cannabis supply chain from seed to sale across a variety of sectors and locations. Leaf Data Systems, the company’s regulatory software platform, is used by state regulatory bodies. KERN is  based in Orlando, Fla.

In April, the company closed the acquisition of Viridian Sciences, a cannabis business management software company. Although the acquisition could solidify KERN’s ecosystem offering and strengthen its channels, it could significantly increase its business expenses in the near term.

KERN reported a $3.51 million  operating loss  for the first quarter, ended March 31, 2020. The company’s net loss increased 40.1% year-over-year to $6.46 million. Its loss per share came in at $0.29 during the period. Moreover, the company’s adjusted EBITDA came in at negative $1.8 million.

The company has a poor earnings surprise history. It failed to beat consensus EPS estimates in each of the trailing four quarters. KERN’s stock has declined 51.1% over the past year and 14.5% over the past three months.

KERN’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. KERN has an F grade for Quality, and a D for Stability. Among the 59 stocks in the D-rated Software-Business industry, it is ranked #51.

We have also graded KERN for Growth, Sentiment, Value, and Momentum. Click here to see them.

Click here to check out our Cannabis Industry Report for 2021

HEXO shares were trading at $5.81 per share on Tuesday morning, down $0.02 (-0.34%). Year-to-date, HEXO has gained 57.88%, versus a 15.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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