2 Beaten-Down Stocks That Haven't Hit Rock Bottom Yet

Key Points

• Canopy Growth seems unable to overcome the industrywide challenges it faces.

• Novavax's recent quarterly update, though strong, says little about its prospects.

• 10 stocks we like better than Canopy Growth ›

Buying shares of beaten-down companies only makes sense if there are good reasons to expect them to bounce back. If that's not the case, stocks that may look cheap and attractive aren't actually so. You should be careful to avoid catching falling knives.

Let's consider two stocks that have significantly lagged the market in recent years but could still fall further: Canopy Growth (NASDAQ: CGC) and Novavax (NASDAQ: NVAX).

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1. Canopy Growth

Canopy Growth emerged as a leader in the cannabis industry toward the end of the past decade. The company has significant operations in Canada, the U.S., and various countries worldwide, including Germany. Despite its position in these markets, Canopy Growth has been a profoundly disappointing investment over the past five years. Its latest results provided another example as to why.

During the fourth quarter of its fiscal 2025, which ended March 31, Canopy Growth's net revenue declined by 11% year over year to 65 million Canadian dollars ($47.6 million). The company's loss per share for the period was CA$1.43 ($1.05), worse than the CA$1.03 ($0.75) it reported in the prior-year quarter.

In fairness, Canopy Growth's troubles aren't entirely its fault. The cannabis industry has been a mess due to legal and regulatory challenges; competition from illicit channels, sometimes even where the product is legal; and oversupply, particularly in Canada, which legalized recreational use of cannabis for adults in 2018. Hardly any pot company has found consistent success over the past five years, despite different focuses, strategies, and executions across the industry.

That may suggest the problem is not exclusive to specific companies. No matter whose fault it is, though, Canopy Growth's business is in shambles, and things are not about to get better. True, the company is engaged in cost-cutting efforts while refocusing its portfolio in Canada on in-demand items, such as vapes and pre-rolls. Management predicts that it will achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in "the near-term."

Yet, even if Canopy Growth gets there, positive EBITDA would only be a step toward profitability. The company's efforts to reduce expenses may help boost margins in the short term. But it's challenging to envision a path for it to perform well in the long run, given the industry challenges that have led to inconsistent financial results over the past half-decade.

Are investors to believe that, after all this time and countless failures across the industry -- both those of Canopy Growth and of others -- the company has finally cracked the code? Convincing the market that that's the case will require more than just positive adjusted EBITDA. I see little reason to expect the pot grower to perform well over the next five years. In fact, I'd expect the stock to sink even further -- and advise investors to stay far away.

2. Novavax

Examining Novavax's financial results and recent progress may suggest that the stock is a compelling investment opportunity. In the first quarter, the company's revenue was $666.7 million, compared to just $93.9 million for the comparable period of the previous fiscal year. Net income was $518.6 million, compared to a net loss of $147.6 million in the first quarter of 2024.

Furthermore, Novavax recently reported positive results from phase 3 studies for its stand-alone influenza vaccine and combination COVID-19/flu vaccine. That's to say nothing of the partnerships it's signed with companies like Sanofi and Takeda Pharmaceuticals, which have paid Novavax for the rights to its COVID vaccines in various countries.

But can the company sustain its performance over the long run? Probably not, and here's why.

First, the coronavirus vaccine market has been inconsistent and hard to predict. Recent regulatory guidance in the U.S. may further complicate matters, with the Department of Health and Human Services no longer recommending the vaccine for certain populations, including pregnant women and healthy children.

It's also worth noting that Novavax has generally played second fiddle to the leaders in this space, Moderna and Pfizer. Novavax's strong financial results in the first quarter are not at all indicative of how it will perform year in and year out.

Second, the company's phase 3 wins for its two leading vaccines were not significant achievements. Although they induced strong immune responses in participants, Novavax itself states that these trials were not designed to demonstrate statistical significance.

In other words, these results won't support approval. And while they're a good stepping stone to phase 3 studies that would, Novavax is waiting for a partner with big pockets to run these trials. That means it either doesn't have the funds to go at it alone, or management doesn't think doing so without a partner will be worth the investment -- or both. Even if it does find a partner, other companies (including Moderna) have made significant strides in developing competing vaccines.

Lastly, the infusion of cash it received from its partnership with Sanofi will eventually run out. The company's business will likely have little to show for itself after that point. All these factors make Novavax unattractive to long-term investors, as the stock could fall much further than it has in the past five years.

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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 Moderna. The Motley Fool has a disclosure policy.