Canadian cookware stocks had a disappointing year. Will 2022 be better?

Marijuana stocks stagnated last year, making investors skeptical of them now. The sell-off was primarily driven by market sentiments related to the lack of positive moves in legalization reforms in the United States. If you neglect the overall stock performance, US cannabis companies had a great year, growing their earnings at an exceptional rate. Most of them were even profitable.

However, the story is different for Canadian stocks. Most Canadian cannabis companies fell on hard times last year as their American counterparts flourished. Shares of Canadian pot companies have been hit hard relative to domestic producers. Many factors were at play. Let’s examine them and see if there is any hope for these companies in 2022.

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What challenged Canadian pot stocks in 2021?

The pandemic has boosted marijuana sales in Canada and the United States, but some headwinds (including fierce competition, shifting consumer preferences, lower profit margins and poor cost management) have not. not allowed Canadian cannabis companies to reap the benefits.

Many Canadian players have blamed pandemic-induced lockdowns for causing supply issues that have affected sales. This is not a new situation for Aurora Cannabis (NASDAQ:ACB)which has seen declining sales in recent quarters and has repeatedly failed to meet its earnings before interest, tax, depreciation and amortization (EBITDA) targets.

Its recent first-quarter results, for the period ending Sept. 30, were no different. Total revenue was down 11% year-over-year to C$60 million ($48 million). Consumer cannabis revenues saw a huge drop of 44% to C$19 million from the prior year period.

I’m not surprised by this, as Aurora seems to have barely made much development towards the introduction of high-margin derivatives. Canada launched derivatives – additional recreational products such as vapes, edibles and drinks – in October 2019, which has been hailed as cannabis legalization 2.0. Despite multiple failed attempts, Aurora has again assured investors that it will have positive EBITDA by the first half of the fiscal year 2023.

Surprisingly, canopy growth (NASDAQ: CGC), which has impressed customers with a variety of such products, seems to be in the same boat as Aurora. Its net sales fell 3% year-over-year to $131 million for the second fiscal quarter of 2022. Its Canadian recreational cannabis sales (less excise taxes) also fell by 4% year-over-year to C$58 million, compared to C$61 million in the prior year quarter. Canopy was also unable to achieve positive EBITDA and even pushed back its positive EBITDA target until the end of fiscal 2022.

Hexo (NASDAQ:HEXO), on the other hand, managed to increase its revenue in the first quarter (ending Oct. 31) to C$50 million, a 70% jump from the year-ago quarter. But it was not enough to generate profits. The company’s losses widened in the quarter to C$116 million from a loss of just C$4.1 million a year ago.

Chronos Group (NASDAQ: CRON)which attracted a lot of attention from investors after the American tobacco company Altria Group bought a 45% stake in the company in 2018, now faces quite a dilemma. The company has yet to release its third quarter 2021 results, which were expected in November. Additionally, he also recently announced in a Securities and Exchange Commission filing that he will have to rephrase its financial statements for the second quarter because it failed to include certain impairment charges. This news sent its stock price upside down and the company is slowly losing investor confidence.

Three glass jars containing cannabis flower buds.

Image source: Getty Images.

Will 2022 be better?

Most Canadian pot companies are keen to expand into the US market, which is heating up with prospects of more state legalization. Industry experts predict that many more states could legalize medical or recreational pot in 2022. Canopy already has two strong partners – the beverage giant Constellation Brands and hemp company Area holdings — to launch its products in the United States Recently, it also announced plans to acquire Colorado-based Wana Brands (a maker of cannabis edibles) upon federal legalization.

Hexo’s management is confident that with its new strategic plan, called The Path Forward, it could become the first Canadian cannabis company to generate positive cash flow over the next four quarters.

These companies would be better served if management focused on revenue growth in existing markets and worked to reduce costs and increase margins before making expansion plans. Canopy management noted on the third quarter earnings call that fierce competition in the Canadian recreational market poses a challenge.

Furthermore, if and when federal legalization takes place, domestic producers will be the first to benefit. It would take some time for Canadian pot companies to establish themselves in US markets despite strong partners. For them, the focus should now be on profitability and strengthening their balance sheets, even before they enter the fiercely competitive US market.

The Canadian cannabis derivatives market could be worth more than C$2 billion a year, according to a Deloitte research report. It would be a smart move to tap into this market first. Canopy Growth and Cronos might be safe for now with strong partners backing them, but the backing won’t help much in the long run if the companies add to their balance sheets with expansion and acquisitions without making a profit. Meanwhile, Aurora Cannabis is digging its own grave through excessive stock dilution (raising capital by issuing new shares), which can be a red flag, especially in the cannabis industry.

Meanwhile, US multistate carriers like Trulieve Cannabis, Care British Columbia, Green Thumb Industriesand curafeuille are in a much better position (some of them even profitable) to step in and when full legalization occurs. For now, 2022 is still shaping up to be tough for Canadian pot players.

Things can change at any time in an evolving industry. However, I would advise investors to steer clear of these Canadian stocks until they show more promising growth numbers. Meanwhile, US marijuana stocks are a definite long-term buy for investors who have an appetite for risk and hope for attractive returns. Most domestic pot stocks are trading below their 52-week high, making this a good time to buy on the downside.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging 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 wealthier.

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