So far, 2020 has been a rough year for the vaping industry and vaping stocks. First, the Food and Drug Administration (FDA) moved early this year to issue a ban on many flavored vaping products, including fruit and mind flavors. This decision was made to curb a surge in teen use of vaping products.
Then coronavirus came and changed everything in business, finance, and our daily lives. The FDA is monitoring and investigating very closely the potential negative impacts vaping products may have on public health, especially the respiratory-illness-related problems.
And with a blurred regulatory framework about the products, the decision to avoid vaping stocks until the coronavirus crisis fades would be well justified. But before I mention the stocks to avoid, it is important for investors to know more about the challenges for these vaping stocks.
Two Serious Dangers for Vaping Stocks in 2020
The World Health Organization has issued some common tobacco and Covid-19 question and answers. To the question “As a vaper, am I more likely to be infected or to have more severe symptoms if infected?” the answer is “There is no evidence about the relationship between e-cigarette use and Covid-19. Given that the COVID-19 virus affects the respiratory tract, the hand-to-mouth action of e-cigarette use may increase the risk of infection.”
This is very important, because in a world where most people are trying to reduce their Covid-19 risk, they may step back from vaping.
A second point to mention is that the FDA will review a lot of applications from vaping companies as the U.S. vape industry faces more regulation. Now, “Anyone who wants to sell vaping products in the United States — the hardware, flavored nicotine liquids, or pre-filled pods used in devices like Juul — must send the FDA a premarket tobacco product application, or PMTA, before midnight for electronic submissions. New tobacco products have to show a net public health benefit compared with cigarettes.”
Practically this means that there are high chances some vaping products will not get approved. If this happens, companies selling or distribution those vaping products will suffer.
Between this regulatory framework and worry about Covid-19, here are three vaping stocks to avoid:
Vaping Stocks to Avoid: Altria (MO)
Altria stock is down over 21% so far in 2020.
In late January 2020, the stock fell after taking a $4.1 billion impairment because of its Juul investment. In addition to a number of lawsuits, Juul faces the regulatory risks mentioned earlier.
The $4.1 billion impairment charge has let to Altria cutting “long-term earnings per share growth targets for 2020 to 2022 from a range of 5% to 8% to an adjusted goal of 4% to 7%.” Certainly not a lot to like there.
The company has had stable revenue for the past five years, but declining profitability, which turned to losses in 2019. Analysts do expect that to return to $4.31 this year. But at the same time, the high debt level poses a threat to the forward dividend yield of over 8%.
Turning Point Brands (TPB)
For Turning Point Brands, the risk of the regulatory framework is extremely high. According to a report at BusinessWire, the company has turned in 250 different “Premarket Tobacco Applications.” that’s 250 different items they’re hoping the FDA will give them the OK on.
If a large number of these products are not approved by the FDA, it could prove to be detrimental for sales, revenue … and the stock price.
The stock price does not seem to be attractive at recent price levels. It is not just the high price-earnings ratio (for the trailing 12 months) of 84. For the past five years, sales have generally risen, but this does not reflect higher profitability — especially for 2019.
With a significant increase in the long-term debt and a net margin that is low at 1.6%, having been cut in half compared to 2019, this stock is too risky and does not look cheap either.
Aurora Cannabis (ACB)
Aurora Cannabis has invested heavily in vape products. This business decision could prove to be correct — but as in the case of the former stocks, it could also be a negative.
Then there’s the fact that the latest earnings report was not good, leaving investors with some fundamental worries. “Although FQ4 revenue came in at C$72.11 million and beat the estimates by C$0.62 million, it still represented a year-over-year decline of 4.5% and a 5% drop from the previous quarter,” wrote TipRanks.
Of particular note, its net loss from continuing operations worsened from last quarter’s 136.1 million CAD to 1.86 billion CAD.
The business outlook is not optimistic either as “Aurora’s F1Q guidance is for C$60 to C$64 million in total cannabis revenue which implies a double-digit sequential decline is on the way,” according to TipRanks.
A highly volatile stock with regulatory risks, fundamentals that show net losses and negative free cash flows for the past five years make Aurora Cannabis too risky, with or without the troubles vaping vaping stocks.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.