The pressure on Hexo (NYSE:HEXO) stock is continuing. The Hexo stock price is down by more than half from its late April highs amid a selloff of cannabis stocks.
It’s tough to pin down an exact cause for the declines. Hexo’s earnings haven’t been stellar, but of course, they haven’t been terrible, either, and the company still is in the early stages of growth. A short-seller report last month was met with a shrug. The company’s plan to move into edibles remains on track.
For the most part, the declines of the Hexo stock price seem attributable to investors’ sentiment towards the space as a whole. After all, the last few months have been a bloodbath for cannabis stocks.
Since May 1, Hexo stock is down 48%. But Canopy Growth (NYSE:CGC) has lost 44% of its value. Cronos (NASDAQ:CRON) has declined 36%, and Aurora Cannabis (NYSE:ACB) tumbled 41% during that time. Aphria (NYSE:APHA) posted probably the best earnings report in the history of the sector – and it’s still down 18% over that period.
To some investors, the selloff looks like an opportunity. And indeed, I’ve expressed cautious optimism towards HEXO. But with its Q4 earnings expected in late October, that selloff also highlights the near-term risk to Hexo stock.
What Will It Take?
One of the problems with cannabis stocks at the moment is that investors are simply selling them on whatever news they get. Cronos, for instance, posted a nice second-quarter beat last month. CRON stock then rose 9% in pre-market trading, closed up 4.5%, and gave back the gains and then some within the following two sessions.
Compare CRON’s chart to that of Aurora or Canopy, both of whom posted supposedly disappointing results (at least relative to Street expectations) and it’s hard to tell the difference. APHA is the only major marijuana stock that trades above the levels seen before its most recent earnings report and, again, it posted a blowout.
Some analysts have argued that investors now are focusing on profitability as a way to explain some of the post-earnings selloffs. But that seems rather simplistic. Profitability isn’t, and shouldn’t be, a near-term goal for most major cannabis players.
That’s particularly true for Canopy and Cronos, which have huge war chests thanks to multi-billion-dollar investments from Constellation Brands (NYSE:STZ,NYSE:STZ.B) and Altria (NYSE:MO), respectively. Those investments were made by major, established consumer companies to drive higher top lines in the shorter term and earnings over the long-term. The giants were not trying to make the cannabis companies’ adjusted EBITDA positive by some arbitrary date.
The issue with marijuana stocks likely isn’t near-term profitability. Rather, it simply seems like almost nothing is good enough at this point to offset bearish sentiment toward the sector. And that seems like a problem for Hexo stock at the moment.
Where Will the Hexo Stock Price Go?
The issue for HEXO heading into earnings is that it’s not focusing on short-term strategy because it can’t. Hexo is trying to become a leader in cannabis edibles, but edibles won’t be available in Canada until mid-December, according to the industry’s regulator. After that, it will take time for providers like HEXO to fully ramp their production and distribution. Moreover, legalization could come later than expected.
And so there isn’t going to be much in the way of news in Hexo’s earnings. I’d expect management will reiterate its target of C$400 million in fiscal 2020 revenue. But that probably doesn’t excite investors, given the plunge of HEXO stock. But the company could boost HEXO stock by meeting its guidance, as most analysts don’t expect that to occur.
It’s hard to see how the Q4 results will change the outlook of HEXO stock. 84% of the company’s Q3 revenue came from flower, but that business won’t be Hexo’s focus going forward. Pressure on flower pricing has been a key focus of the recent results of cannabis companies; it’s likely to be a factor in Hexo results as well.
To be sure, I didn’t see the blowout report from Aphria coming, though in my defense, few did. It’s possible I’m missing something with Hexo as well.
Still, it’s exceedingly difficult to identify a catalyst. Hexo’s outlook won’t get tested for real until next year. And so there’s just not going to be a lot of news in Hexo’s Q4 report. Given investors’ sentiment toward the space right now, that hardly seems like a good thing.
As of this writing, Vince Martin has no positions in any securities mentioned.