Hexo Stock Is a Falling Knife That Could See a Few Dead Cat Bounces

Too risky to short, too risky to buy means avoid HEXO stock

What’s next for Hexo (NYSE:HEXO) stock? After falling as low as $1.56 per share, shares of Hexo have rebounded back above the $2 price level. With the upcoming launch of “Cannabis 2.0” products (edibles, beverages, vapes), as well as Hexo’s rollout of its low-priced Original Stash brand in Ontario, things could be looking up.

Hexo Stock Is a Falling Knife That Could See a Few Dead Cat Bounces
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Or are they?

HEXO is no longer in aggressive growth mode, but in survival mode. Thanks to regulatory red tape, the Canadian pot stocks have had a hard time getting their product to consumers. This has resulted in heavy competition from black market pot sellers.

But, the Hexo stock price could benefit from several “dead cat bounces.” While the stock is by no means undervalued, an improved Canadian pot market, along with an increased likelihood of the American pot market fully opening up, could send shares higher.

Is It the Beginning of the End for Hexo Stock?

The most recent earnings release was bad news for Hexo stock. Throughout 2019, sales have barely budged. Quarterly revenues for the period ending July 31 (Q4 2019) were $11.7 million, compared with $9.7 million in the quarter ending April 30, and $10.2 million for the quarter ending Jan. 31. As the company scaled up operations, operating losses accelerated to $46 million.

For the fiscal year 2020 (year ending October 31, 2020), Hexo projects positive EBITDA. But given lower-than-expected demand and Canadian store rollout, the company has retracted their prior revenue guidance.

Yet, with lowered expectations, the Hexo stock price could rally if new developments pay off. With the launch of Hexo’s Truss joint venture with Molson Coors (NYSE:TAP), Hexo’s future performance could be rosier than expected. Truss releases its first product this month, CBD-infused spring water Flow Glow.

Molson Coors projects the total addressable market for cannabis beverages in Canada is between $1.5 billion and $3 billion. With first mover advantage, this venture could capture material market share.

Another positive catalyst is the launch of Original Stash dried flower product in Ontario. This discount pot brand can compete on price with black market sellers. Excess inventory is an issue plaguing Hexo. The company produced 16,824 kg of cannabis in Q4 2019, compared to 4,818 kg sold. If Original Stash takes off in Ontario, this spread between production and sales could improve.

But these catalysts may already be incorporated into the Hexo stock price. Taking a look at valuation, shares look cheap at first glance. But the market’s discount may be rational.

Hexo Shares Aren’t Cheap

Based on enterprise-value-to-sales (EV/Sales), Hexo stock trades at a similarly to peer Aurora Cannabis (NYSE:ACB). Hexo currently trades at an EV/Sales ratio 0f 12.9. ACB has an EV/Sales ratio of 13.9.

Other competitors, like Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) sell at higher multiples. CGC trades at an EV/Sales ratio of 19.7, while CRON’s EV/Sales is 32.

But there’s good reason why Aurora and Hexo trade at lower multiples. Canopy and Cronos have significant backing from their strategic partners. Beverage maker Constellation Brands (NYSE:STZ) has all but taken over Canopy Growth. Altria Group (NYSE:MO) holds significant interest in Cronos.

Hexo may have their partnership with Molson Coors, but the beer giant has not committed a multi-billion dollar war chest to Hexo. Simply put, Hexo needs money. ACB is in a similar boat,  burning through cash, Aurora likely needs dilutive capital raises to stay afloat.

HEXO recently had a capital raise of its own. Back in October, the company raised $70 million via a private placement. The primary buyers of these convertible debentures were Hexo insiders. In October 2020, these notes are convertible into Hexo stock at $3.16 per share. While the Hexo stock price currently is far below this strike price, this move impacts upside.

Bottom Line: Hexo Is Not a Solid Bet, But Upticks Are Possible

Hexo is down but not out. But a comeback may already be baked into the Hexo stock price. Recent moves to reduce cash burn are laudable. But like its peer Aurora, Hexo may require additional dilutive cash infusions.

This means less upside for Hexo stock. But the company’s newest developments may save the day. If the Truss Beverage venture is a success, the company could see sales improve. The rollout of Original Stash in Ontario could also move the needle.

But these could turn on a dime. Who’s to say Truss ends up a novelty product, and not a major beverage choice? Perhaps Original Stash fails to capture a large segment of the market already served by illegal pot dealers.

Additional disappointment could send Hexo straight down to the $1 price level. But an ounce of good news could send shares on another “dead cat bounce.”

With this in mind, by no means short Hexo stock. But don’t go long either. With HEXO, the best call is to stay on the sidelines.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/hexo-stock-is-a-falling-knife-that-could-see-a-few-dead-cat-bounces/.

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