The stock market hasn’t been in the best shape this year. Growth stocks have been hit particularly hard due to valuation concerns and impending interest rate hikes in the U.S. All these issues are merely temporary, though, and it’d be best for investors to look past them and hold on to shares of great companies.
1. Inovio Pharmaceuticals
Inovio Pharmaceuticals is a clinical-stage biotech that focuses on developing DNA-based therapies and vaccines for various viruses and infectious diseases. And after being one of the leaders in the hunt for a COVID-19 vaccine back in early 2020, it has fallen on hard times in the past two years. The company’s shares are now trading near their pre-pandemic levels.
But the biotech hasn’t given up on its hopes to enter the coronavirus vaccine market. It is currently running a phase 3 clinical trial for its candidate, INO-4800, in several countries. The company plans to release some data from this study in the first half of the year.
Inovio’s goal is to target those countries where there remains an unmet need for coronavirus vaccines. However, it is unclear whether the company’s strategy can work. First, it will have to produce solid results for its candidate in its ongoing pivotal clinical trial. Indeed, the company will have to show that INO-4800 is as good as the best available vaccines. Otherwise, the market will mostly shrug at the results of its ongoing study.
After all, if Inovio’s candidate isn’t at least as potent as the already approved vaccines, why would it see any meaningful success?
Second, while the authorization process for many other vaccines was fast, now that vaccines are widely available, Inovio’s path to launching its candidate on the market may be much longer. Third, Inovio will unquestionably face competition in the market no matter which country it targets with its candidate.
The biotech has other candidates in the pipeline, but none will hit the market this year. Further, as a clinical-stage biotech, Inovio currently has no products on the market and is consistently unprofitable.
All these factors add a considerable amount of uncertainty to Inovio’s future. The market does not like uncertainty, and given how volatile it has been in the past three months, investing in stock as risky as Inovio seems like the wrong move. That’s why investors should stay away from this biotech stock this year.
2. Cronos Group
Toronto-based Cronos Group, which produces and sells various recreational and medical cannabis products, has been involved in a bit of drama lately. On Nov. 9, it filed a form 12b-25 with the U.S. Securities and Exchange Commission. This is a form companies must file with the authorities when they anticipate not being able to meet the deadline to release their quarterly updates. Cronos Group said it needs more time evaluating some impairment charges before reporting its third-quarter results for the period ending Sept. 30, 2021.
Investors reacted to this news by sending Cronos Group’s stock tumbling, and with good reason. A publicly-traded company not being able to meet the deadline to file its quarterly report isn’t unheard of — that’s why form 12b-25 exists in the first place. Yet this turn of events isn’t the norm, either, not by a long shot. The market might have been more lenient with Cronos Group if there were other things to cheer about the company. But alas, the pot grower’s results have hardly been satisfactory.
True, Cronos continues to record rapidly growing revenue. In the second quarter, which ended June. 30, Cronos Group’s net revenue came in at $15.6 million, 58% higher than the year-ago period. Although the company recorded a gross loss of $15.8 million, which was much worse than the gross loss of $2.9 million it recorded during the third quarter of 2020. It seems that even as the revenues increase, the cost of sales and inventory write-downs outpace the sales, which could hint at some operational issues.
Cronos Group also reported an operating loss of $60.2 million, which was worse than the operating loss of $34.7 million it recorded for the year-ago period. Cronos Group’s net income of $56.8 million during the quarter was due to noncash income that isn’t at all related to its day-to-day business operations. That’s very disappointing because recreational use of marijuana has been legal in Canada since late 2018.
At this stage, many expected cannabis companies to be performing a lot better than they are. That’s especially the case for Cronos Group since it famously partnered up with Altria. In 2018, the tobacco giant, Altria, invested 2.4 billion Canadian dollars in Cronos and acquired a 45% stake in the pot company. Altria’s large cash reserves and vast international footprints were supposed to help catapult Cronos Group to the next level.
But three years after the fact, the cannabis company remains unable to record consistent profits — that is, without relying on gains on the revaluation of derivative liabilities related to the deal with Altria. What’s more, Cronos Group’s revenue figures pale in comparison to those of many of its peers. Investors interested in cannabis companies would be better served considering purchasing shares of a company like Trulieve Cannabis, which has an impressive presence across the U.S. and is consistently profitable.
As far as Cronos Group is concerned, perhaps the company has a bright future ahead but based on the available data, it’s not worth it to invest in this company right now.
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.