Is the Right Move to Buy Hexo Stock Amid Cannabis Rebound?

This year's huge correction has pushed HEXO stock's market cap below $530 million

Cannabis stocks have been on the mend lately, although most are still carrying painful losses this year. Hexo (NYSE:HEXO) is not an exception to this observation. Hexo stock has been under considerable pressure, down 37% in 2019 and more than 70% from its May high.

Is the Right Move to Buy Hexo Stock Amid Cannabis Rebound?
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Is the cannabis space really going to make a comeback? That much isn’t clear yet, unfortunately. But we can determine which ones to buy in the event that names like Hexo stock do rebound.

In November, these names fell off a cliff. I mean, really tanked hard amid relentless selling. Painful as it was, the plunge at least got the discussion going that perhaps these names were capitulating. There could still be some end-of-year selling as investors look to lock in tax losses, but positive signs are starting to emerge.

For instance, on Tuesday, when the stock market opened lower with indexes down more than 1%, pot stocks were holding in. Then they turned positive and started to gain momentum. How could cannabis stocks be green on the day when the S&P 500 index was down 1.3% for the session?

These are not high-quality equities or a flight-to-safety asset class. That got my attention and I’m now taking the charts more seriously.

Trading Hexo Stock

At the beginning of summer, cannabis stocks started to swoon. I flagged a few of these breakdowns, like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB), cautioning investors to be careful now that key support was giving way.

I didn’t expect it would lead to some of the declines we’ve seen since. Many of these names are down 60% to 70% from the highs, while Tilray (NASDAQ:TLRY) is down 90%. Ouch!

However, most of these names are rebounding from the lows — Hexo stock included. Like I said of CGC the other day, two developments are now critical for bulls. First, Hexo stock price must avoid making new lows. It was a panic collapse that sent shares down to $1.56.

Bulls also need to see Hexo stock price clear downtrend resistance (blue line). Clearing the 50-day moving average would also open things up a bit on the charts. In short, we need to stop seeing lower lows, and starting seeing higher lows develop on the chart.

We’re unlikely to go from a sharp downtrend to a massive uptrend overnight. There will be setbacks along the way, but we need to see these two developments before we can trust Hexo.

On the chart above, investors can also see that $2 has played a key role lately. Below it should put investors on caution for a possible retest of the lows. If it can hold above $2 a share, a test of its downtrend marks will be in the cards, as well as a possible push to $3. Let’s keep an eye on Hexo stock.

Bottom Line on Hexo Stock

Do the charts make Hexo stock a buy? In a word: no. The charts show that the situation is improving from a few weeks ago, but has not signaled the all-clear to investors just yet.

So what about the fundamentals?

Judging cannabis stocks based on the fundamentals is difficult. That’s because many have triple-digit sales growth but low revenue figures. Further, most are not free cash flow positive or profitable, yet garner valuations in the billions.

Because of the large correction this year, Hexo stock now sports a market cap of $527 million. Is that too much? Well…

Last year, Hexo had net revenue of 47.3 million CAD ($35.9 million) and lost over 86 million CAD. Investors should know that profits have been elusive for this company.

That’s not necessarily a nail in the coffin, but companies that are sacrificing profits for growth need to have staying power via the balance sheet. With just 113.5 million CAD in unrestricted cash, some investors have to be nervous. That’s even as current assets sit at 314 million CAD, compared to just 52.6 million CAD in current liabilities.

But the acceleration in liabilities — with total liabilities up to 104.3 million CAD last quarter from 17.3 million CAD three quarters ago — and the negative cash flow is a concern. Hexo isn’t the worst pick, but amid a cannabis comeback, I prefer Aphria (NYSE:APHA) and Canopy Growth stock, which have stronger balance sheets.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long APHA.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/is-the-right-move-to-buy-hexo-stock-amid-cannabis-rebound/.

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