One of the classic rules of investing is to always be worried when a company puts out a press release on Friday afternoon. It’s never good news. If the company wants attention, it doesn’t put something out just ahead of a weekend. So when Hexo (NYSE:HEXO) released news on Friday after the market closed, you’d be right in thinking it’d be a negative development.
Still, even with those expectations, this one is pretty shocking. Just months after taking the job, Hexo’s CFO quit. What happened?
HEXO CFO Departure Makes Little Sense
Hexo’s Friday press release included a statement from the CFO, Michael Monahan, explaining why he chose to resign:
Since joining HEXO Corp, it has become apparent that this job requires me to spend the majority of my time in Gatineau and in Ottawa. During this phase of rapid expansion, the Chief Financial Officer should be working very closely with all team members, in person. This isn’t possible for me at this time given my family’s needs and so I have decided to resign.
This is simply incredible, given that Monahan took over as Hexo’s CFO in June. This means that Monahan acted as Hexo’s CFO for just one quarter.
Bulls can try to spin this as saying that Hexo hired Monahan to get a U.S.-based CFO to try to help market the company in America. Monahan, after all, previously was the CFO for Nutrisystem. During his leadership, Nutrisystem’s share price rose considerably, and the company eventually was acquired. That’s a success on all fronts. Perhaps Hexo imagined that Monahan would be able to lead to a similar outcome this time as well.
Still, it seems implausible that HEXO would hire Monahan without making it clear how much time he would be spending in Canada. CFO resignations are never good. They’re especially bad when the CFO has only been on the job for a few months. It gives off the impression that there’s something deeply unfavorable potentially lurking behind the scenes.
At best, it looks incompetent. If Monahan truly resigned to spend more time with his family, it would show that Hexo’s leaders did a poor job communicating with him about the position’s responsibilities before hiring him. And at worst, who knows what might happen next. Just ask CannTrust (NYSE:CTST) owners about their recent experiences as one scandal followed after another.
Hexo Stock’s Earnings Just Got Riskier
Hexo is supposed to report earnings within the next week. In general, it has been a bad idea to hold Canadian marijuana stocks through earnings in 2019; traders have lost huge sums of money. Throw in this CFO resignation at Hexo just ahead of the press release, and it’s downright scary to hold HEXO stock at this point.
You have to wonder if the company has more bad news coming with that earnings release. As it is, the company probably isn’t going to report great numbers. Canada’s marijuana market is vastly over-supplied. Vaping, a key market for Hexo, is looking more troubled with every passing week. And the all-important drinks joint venture with Molson Coors (NYSE:TAP) doesn’t kick off until later this year.
Add it all up, and there is good reason to expect a soft earnings report anyway. Now with the CFO in a hurry to leave, who knows what the company will report.
Hexo Still Has A Shot
To be fair, there is still a case for HEXO stock eventually turning things around. As a TAP stock owner myself, I see the drinks venture as holding a lot of potential promise, and Molson Coors is certainly a strong backer. Given how badly Canopy (NYSE:CGC) has fared recently, you could argue that only Cronos (NASDAQ:CRON) has a much stronger alcohol and tobacco partner than Hexo at this point.
InvestorPlace’s Thomas Niel made the case for HEXO stock being cheap recently. On a relative valuation basis, Hexo stock does seem more attractive than many of its peers. If — admittedly a big question mark — Hexo hits its 2020 revenue targets, it could be one of the cheapest marijuana stocks out there. A lot of that, however, depends on how the Molson Coors partnership goes, and we won’t have any sales figures on that for a few months yet.
HEXO Stock Verdict
Hexo’s investor relations webpage has a simple motto: “Investing in the future, today.” You know who won’t be investing in that future? Hexo’s former CFO, who was the second most important person in the company. If he wants out of the firm ahead of its exciting drinks launch with Molson Coors, then why would you or I possibly want in at this time?
For marijuana companies facing difficult industry headwinds, you have to put your best foot forward. Hiring a CFO who immediately bails on you is a terrible look. Hexo could turn things around. But there’s no need to buy the stock today. Let’s see how their earnings report goes before buying the dip in Hexo stock.
At the time of this writing, Ian Bezek owned TAP stock. You can reach him on Twitter at @irbezek.
