Buying stocks after they have lost significant market value can lead to excellent returns in the long run, but only if the company in question can reverse its fortunes.
Sometimes, corporations lag the broader market for good reasons. Maybe they aren’t delivering strong financial results, or their prospects look increasingly dim. Investors want to stay away from these stocks even when they look like they hit rock bottom since they are unlikely to recover and deliver solid returns.
With that in mind, let’s consider two companies near their 52-week lows that still don’t look attractive: Tilray Brands(NASDAQ: TLRY) and Novavax(NASDAQ: NVAX).
Tilray Brands is a leader in the cannabis market, but considering how poorly this industry has been performing in recent years, that’s not exactly a claim to fame.
The legal landscape in the sector remains unfavorable in many countries, including the U.S., where recreational use of pot is still illegal at the federal level. Even in Canada, which has friendlier laws, stringent retail licensing requirements, oversupply, and competition from illicit channels have been significant headwinds for Tilray and its peers.
As a result, the company’s financial results have not been particularly good. Much of Tilray’s revenue growth came from acquisitions while it remains unprofitable.
True, Tilray has diversified its operations. Thanks to several acquisitions, it became a leader in the U.S. craft brewing market. Still, Tilray continues to place its hopes in the cannabis industry. The company’s CEO, Irwin Simon, has predicted that recreational use of the substance will be legalized in the U.S. at the federal level in the next four years. And once (if) that happens, Tilray will likely seek to use its standing in the craft brewing space to get in and dominate the market for cannabis-infused drinks.
However, even U.S. legalization might not be enough to save Tilray’s prospects. For one, it might come with all sorts of rules and regulations that will hinder its ability to do business. That’s what happened in Canada: Since the country legalized weed more than six years ago, every single pure-play, publicly traded company that dipped its toes in this market has lost significant value. Further, legalization in the U.S. would almost certainly attract bigger players with deeper pockets and significant experience navigating markets for highly regulated substances.
Tilray might still be able to carve out a lucrative niche for itself under these conditions, but considering legalization in the U.S. is no guarantee and taking into account the company’s record in the past six years, there is little reason to hope that it will be successful from here on out. So, even at current levels, Tilray isn’t worth the trouble.
Novavax performed well last year, but the company’s shares are down significantly over the past three years and are not far from their 52-week lows of $3.81.
Although the biotech was once a leading pick to dominate the COVID-19 vaccine market, things didn’t turn out that way as it fell behind the eventual leaders: Moderna and the team of Pfizer and BioNTech. Novavax earned a win last year when it penned a deal with biotech giant Sanofi that granted the latter the rights to commercialize Novavax’s coronavirus vaccine in most countries worldwide.
Sanofi also got the go-ahead to use Novavax’s adjuvant technology for some of its own vaccines in development. The agreement came with a $500 million upfront payment for Novavax and up to $700 million in milestone payments in addition to royalties.
That’s why Novavax’s shares soared last year, but it has been downhill ever since. While the deal helped infuse some much-needed cash into the company, it still has to develop and market its own products to be successful. Novavax’s late-stage pipeline features a stand-alone flu vaccine and a combination COVID/flu one.
These investigational vaccines hit a regulatory setback late last year when the U.S. Food and Drug Administration (FDA) put a clinical hold on both candidates due to suspected severe adverse reactions. Thankfully, the FDA subsequently lifted these clinical holds, but this episode highlighted that Novavax is a high-risk play. Clinical and regulatory headwinds could be catastrophic to its prospects.
That would be less of a problem if Novavax were already generating significant revenue, or if its products looked extremely promising. But that’s not the case, at least not yet. The flu vaccine market will look increasingly crowded, especially with mRNA-based candidates that are faster to produce and could help increase the otherwise low effective rate the current options typically have.
Many are also working on combination COVID/flu vaccines. Novavax’s candidate could prove more effective in late-stage studies, but there is little reason to think it will, and if it doesn’t, its shares will fall off a cliff. So, Novavax doesn’t look like an attractive biotech stock right now. Investors should stay away.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends BioNTech Se, Moderna, and Tilray Brands. The Motley Fool has a disclosure policy.
