Hexo (NYSE:HEXO), like so many other cannabis plays lately, has seen better days. Its equity is struggling for upside as sellers continually bat prices lower and lower. Just four months ago, the Hexo stock price was trading for more than $8 per share. Now at $4, shares are at a very critical juncture on the charts.
If it holds, perhaps HEXO bulls can start repairing some of the technical damage. It will take time to unwind some of the longer and stronger downtrends. But in order to do so, it would be most helpful if this vital level of support would hold.
Let’s look at this important level and see whether Hexo stock is a worthwhile long currently down more than 50% from its recent highs.
Trading Hexo Stock
Hexo stock is problematic for the bulls because it has a number of downtrends currently in place. The 20-day and 50-day moving averages (DMAs) are both trending lower, while various lower highs (blue lines) are also present.
In order for HEXO to be considered healthy on the long side, it needs to fight through some of these bearish trends. Keep in mind, these trends played a large part in driving HEXO down to the levels it’s at now.
However, my concern isn’t so much around resistance. Instead, I’m worried about support holding. At the $3.75 level, Hexo stock has twice found a bevy of buyers over the last few months.
When the stock tested this mark in July, shares rallied to $4.95 — up 32% — in just a few weeks. Currently at the 20 DMA now, HEXO has a chance to continue pushing higher. If it can, it will start to repair some of the chart’s technical damage. Although it does little good if HEXO can’t hold those gains and stay above some of these negative trends.
So, what’s the bottom line on the technical front?
We’re seeing the stock start to press into some of its resistance marks. The further it can go, the better. Over the 20 DMA, and it would be constructive to see this moving average turn into support rather than act as resistance. Above the 20 DMA and downtrend resistance, and the 50 DMA is the next target.
Most importantly though, bulls need to keep the Hexo stock price north of $3.75. Below could cause a flush to the December lows.
Final Thoughts on HEXO
For cannabis stocks, the struggle is real. Many names — be it Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB) or Cronos Group (NASDAQ:CRON) — have all seen their share prices under significant pressure.
As awesome as it is to see revenue growth rates in the 1,000% range so far this year, we must keep a few things in mind. First, through the first two quarters of Hexo’s fiscal year, the company has generated less than $20 million in sales. For a company with a $1.08 billion market capitalization, that’s a problem.
With that low of revenue, it’s not hard to see how Hexo generates an operating and net loss for its business. That also means it generates a free cash flow deficit. When a company has a negative draw on its cash each quarter, that doesn’t mean it’s a dud. But it does mean it needs to have a strong balance sheet to weather the fundamental decline.
While the company’s cash and current assets have declined year-over-year, its liabilities are small in comparison. That goes for both current and total liabilities. With current assets of almost $200 million ($129 million of which is in cash), current liabilities of just $35.4 million doesn’t cause much concern.
No matter how investors cut it though, an approximately $1.1 billion valuation for a stock generating about $10 million in quarterly revenue is a high valuation. And when the valuation is this high, we need to see the technicals behaving better. Until we do, investors need to be cautious with Hexo stock.