Cannabis stocks have been in a brutal bear market since 2018. Among the worst performing ones during this time has been Hexo (NYSE:HEXO). Suffice it to say that loyal shareholders haven’t been rewarded for standing by Hexo stock.
Don’t get me wrong. I like a bargain as much as anyone. Plus, I’m still a believer in the cannabis industry on a long-term basis. There are some beaten-down stocks in the sector that I might actually recommend.
Hexo stock isn’t one that I would buy on the dip, however. Informed investors must understand the difference between buying when there’s blood on the streets (to loosely quote Warren Buffett) and trying to catch a falling knife.
If you need evidence to show that Hexo is having real problems, keep reading. Indeed, there’s one recent development that should convince any Hexo holdouts to immediately abandon ship.
A Closer Look at Hexo Stock
Whereas many pot stocks peaked during the hype-fueled days of 2018, Hexo stock actually topped out in 2019. Nonetheless, traders would be hard-pressed to convince anyone that Hexo is just a late bloomer.
There’s no blooming in progress as the decline in Hexo stock has been relentless. It’s heartbreaking to see how this stock, which once traded above $8, is now priced below $1 per share.
Some folks might try to blame the onset of the novel coronavirus for this. Yet, Hexo stock holders’ problems began prior to 2020.
I’ll grant that the global pandemic made a bad situation worse. Still, this year’s losses in the Hexo share price have been an extension of 2019’s brutal price action.
On the final day of October, Hexo stock shed 15.5% in value. That’s in a single trading session. Cannabis stocks are known to be volatile, but when there’s no sign of a turnaround, it’s okay to cut one’s losses and move on.
A Spooky October
For Hexo’s investors, Halloween might not have been the scariest thing about the month of October. I already mentioned how the month ended on a deep red day for Hexo stock, but there’s another development that’s even spookier than that.
Discouragingly, on Oct. 30 Hexo announced its plans to initiate an eight-for-one reverse share split. Actually, it was referred to as a “share consolidation.” But that’s really just a fancy way of saying a reverse split.
As I learned from InvestorPlace contributor William White, the evident purpose of the reverse split is to get the Hexo stock price back above $1. Assuredly, Hexo isn’t doing this just to save face.
Rather, it’s because the New York Stock Exchange has been known to de-list stocks that trade below an average of $1 for a 30-day period. Unfortunately for Hexo and its investors, the company’s shares haven’t traded above $1 since June 12.
What to Expect
So now, we have to address a number of questions. For one thing, the reverse split isn’t finalized yet as it will first require approval from the New York Stock Exchange as well as the Toronto Stock Exchange.
Next, if the reverse split does happen (and it probably will), current Hexo shareholders need not worry about losing their shares. They’ll have fewer shares, but the total value of their accounts won’t be any different.
But then, the value of Hexo stock might decline due to the psychological trauma associated with the reverse split. The trading community knows full well that reverse stock splits are a sign that a company is in trouble.
From my experience, I’ve found that stocks tend to continue on a downward trend after reverse splits take place. And make no mistake about it – Hexo is a company in decline.
As evidence of this, note that Hexo’s recently reported fiscal fourth quarter shows a net loss of 169.5 million CAD. That’s much worse than the net loss of $19.1 million CAD recorded during the company’s fiscal third quarter.
The Bottom Line
Reverse stock splits are generally a bad sign. The imminent share consolidation in Hexo stock might help the company regain compliance with the New York Stock Exchange’s listing requirements.
Yet, it won’t help the company or the shareholders in the long run as the decline in Hexo stock will likely resume after the consolidation.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.