Amid a cash crunch, Hexo (NYSE:HEXO) stock continues its sell-off. The Gatineau, Quebec-based marijuana producer has seen its cash dwindle as investors have turned on the sector amid oversupply and vaping-related issues. As a result, a company that once came close to becoming profitable now looks more like a sinking ship. Unless and until Hexo stock can improve its cash situation and establish a bottom, investors should stay away.
I’m forced to offer a mea culpa on Hexo stock. I had considered HEXO one of my favorites of the non-top-tier marijuana stocks.
After all, they have a strong base in their home province of Quebec, which constitutes about 21% of Canada’s population. Also, they established an alliance with Molson Coors (NYSE:TAP) to produce cannabis-infused beverages following their recent legalization in Canada. On top of that, they had been on track to turn a profit.
The latest earnings report changed that. HEXO plummeted by 23% in one day as the company dramatically lowered fourth-quarter guidance and withdrew guidance completely for fiscal 2020.
The actual earnings release for the fourth quarter later in the month led to a further decline. The stock price has now fallen by more than 46% in a little more than a month.
Outside of the company, the vaping crisis has contributed to its problems. Though the latest evidence points to black-market vape pens, the entire industry has suffered.
Moreover, the Canadian market faces a massive oversupply. Thanks in part to high taxes and tight regulation, many consumers continue to turn to the black market. As Josh Enomoto mentioned, illegal weed makes up about 60% of the market. Now, the company ceased production at one facility and took 200,000 sq. ft. offline at its main facility in Gatineau, Quebec.
HEXO Low on Cash
Top executives have left the company, including the CFO, who left soon before Hexo issued guidance. The timing for this is not fortuitous as the company faces a cash crunch. It currently holds about CAD$139.51 million in cash. Since it lost CAD$81.56 million in the last quarter, the company needs to find funding quickly.
As Wayne Duggan pointed out, the CAD$70 million it raised through a 7% dilution will not get it through a quarter as its current burn rate. The CAD$30.26 million in long-term debt is not high, considering its CAD$776.76 million in equity.
Still, without a dramatic cut in losses, that option appears limited as well. Further, the deal with Molson Coors is not the kind of investment that Constellation (NYSE:STZ) has made in Canopy Growth (NYSE:CGC). Hence, Hexo is not equipped to weather this crisis as well as Canopy or other top-tier weed stocks.
Have I given up all hope? Not yet. However, it appears to have entered a “blood in the streets” moment. The question has become whether Warren Buffett-like investors will buy into this crisis. I think maybe, but not yet. Hexo stock trades near its 52-week low. Only rarely are such points a good time to buy. Unless it finds a floor somewhere above $0 per share, investors probably should watch HEXO instead of buy.
The Bottom Line on Hexo Stock
Unless and until the HEXO finds a floor, investors need to stay on the sidelines. The outlook for Hexo stock has turned dramatically negative over the last few months. Hexo look poised to become profitable a few months ago. Its substantial market share in Quebec and deal with Molson Coors appeared to point to a bright future.
However, thanks to a marijuana supply glut and concerns over vaping, instead, the company faces a cash crunch. With the Hexo stock price now below $2 per share, further dilution is not much of an option.
Also, even with low liabilities, debt financing can only help them sustain quarters like the previous one for a limited time. Hexo is not dead yet. However, if it saves itself, it will not happen without more pain.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.