While the U.S. pot growers had an amazing 2021, dark clouds loomed over their Canadian counterparts.

Marijuana stocks flatlined last year, making investors skeptical about them now. The sell-off was mostly driven by market sentiments related to the lack of positive movements in U.S. legalization reforms. If you overlook the overall stock performance, the U.S. cannabis companies had an excellent year, growing revenue at an outstanding rate. Most of them were even profitable. 

However, the story is different for Canadian stocks. Most of the Canadian cannabis companies had a hard time last year while their U.S. counterparts were flourishing. Canadian pot companies' shares took a hard hit compared to the domestic growers. Many factors were at play. Let's take a look at them and see if there is any hope for these companies in 2022. 

What challenged Canadian pot stocks in 2021?

The pandemic boosted marijuana sales both in Canada and the U.S. But some headwinds (including stiff competition, changing consumer preferences, lower profit margins, and poor cost management) did not allow the Canadian pot companies to reap the benefits.

Many of the Candian players blamed the pandemic-induced lockdowns for causing supply challenges that affected sales. This is not a new situation for Aurora Cannabis (NASDAQ:ACB), which has been recording declining sales for the past few quarters and has repeatedly missed achieving its targets for earnings before interest, taxes, depreciation, and amortization (EBITDA).

Its recent first-quarter results, for the period ending Sept. 30, were no different. Total revenue declined 11% year over year to 60 million Canadian dollars ($48 million). Consumer cannabis revenue saw a huge slump of 44% to CA$19 million from the year-ago period.

I am not surprised by this, as Aurora seems to have hardly made many developments toward introducing high-margin derivatives. Canada launched derivatives -- additional recreational products such as vapes, edibles, and beverages -- in October 2019 which was hailed as Cannabis 2.0 legalization. Despite multiple failed attempts, Aurora has again assured investors that it will be EBITDA positive by the first half of fiscal 2023. 

Surprisingly, Canopy Growth (NASDAQ:CGC), which impressed customers with a variety of these products, seems to be in the same boat as Aurora. Its net revenue fell 3% year over year to $131 million for the 2022 second fiscal quarter. Its Canadian recreational cannabis sales (minus excise taxes) also fell 4% year over year to CA$58 million from CA$61 million in the year-ago quarter. Canopy hasn't been able to achieve positive EBITDA, either, and even pushed its positive EBITDA target to the end of fiscal 2022.

Hexo (NASDAQ:HEXO), on the other hand, did manage to grow its revenue in the first quarter (ended Oct. 31) to CA$50 million, a 70% jump from the year-ago quarter. But it wasn't enough to generate profits. The company's losses widened in the quarter to CA$116 million versus a loss of just CA$4.1 million in the year-ago period. 

Cronos Group (NASDAQ:CRON), which received a lot of investor attention after U.S. tobacco company Altria Group bought a 45% stake in the company in 2018, faces quite a dilemma now. The company hasn't reported its third-quarter 2021 results yet, which were due in November. Moreover, it also recently announced in a Securities and Exchange Commission filing that it will have to restate  its financial statements for the second quarter, as it missed including some impairment charges. This news has caused havoc with its stock price, and the company is slowly losing investors' trust.

Will 2022 be better?

Most of the Canadian pot companies are keen on expanding to the U.S. market, which is heating up with prospects of more state legalization. Industry experts predict many more states could legalize either medical or recreational pot in 2022.  Canopy already has two strong partners -- beverage giant Constellation Brands and hemp company Acreage Holdings -- to launch its products in the U.S. 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 flows within the next four quarters.

These companies would be better served if management focused on growing revenue in existing markets and worked on reducing costs and growing margins before making any expansion plans. Canopy's management noted in the third-quarter earnings call that stiff competition in the Canadian recreational market is posing a challenge.

Besides, if and when federal legalization happens, the domestic growers will be the first to benefit. It would take a while for the Canadian pot companies to establish themselves in the U.S. markets despite having strong partners. The focus for them now should be profitability and strengthening their balance sheets, even before they enter the fiercely competitive U.S. market.

The Canadian cannabis derivatives market could be worth more than CA$2 billion annually, according to a research report by Deloitte. It would be a smart move to take advantage of this market first. Canopy Growth and Cronos might be safe for now with strong partners backing them, but the support won't help much in the long run if the companies burden their balance sheet with expansion and acquisitions without making profits. Meanwhile, Aurora Cannabis is digging its own grave by excessive share dilution (raising capital by issuing new stock), which can be a red flag, especially in the cannabis sector.

Meanwhile, American multi-state operators like Trulieve Cannabis, Columbia Care, Green Thumb Industries, and Curaleaf are in a much better position (some of them are even profitable) to jump in of and when full legalization happens. For now, 2022 still looks challenging for the Canadian pot players.

Things can turn around any moment in an evolving industry. However, I would advise investors to steer clear of these Canadian stocks until they show more  promising growth numbers. Meanwhile, the U.S. marijuana stocks are a definite buy and hold for the long haul for investors who have an appetite for risk and a hope for exciting returns. Most of the domestic pot stocks are trading below their 52-week high making it the right time to buy them at the dip.