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Why the Pain In Hexo Shares Is Likely to Continue

Like many other cannabis shares, Ottawa, Canada-based Hexo (NYSE:HEXO) stock has not had a good 2020. So far in the year, Hexo stock is down more than 50%. By comparison, the widely-followed industry exchange-traded fund (ETF), the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), dropped 16%.

Hexo Stock May Be Fast Approaching Its Blood-on-the-Streets Moment
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This article will look at what to expect from Hexo stock in the coming weeks. By fundamental metrics, the company is a high-risk investment. If you are not a shareholder, you could possibly better invest your capital in another stock either in the cannabis space or in another sector.

Importance of the U.S.

For most Canada-based pot companies, “Legalization 2.0” has been important. As a result, these businesses, including Hexo, launched new products, such as cannabis-infused drinks and vapes, helping them improve revenue.

However, the market in Canada remains limited. The industry is in great need of growth as would be offered by a large market like the United States.

Research led by Debra A. Hunt of Frontier Nursing University in Versailles, Kentucky, says, “Cannabis (also known as marijuana) is a genus of flowering plants with a long history of medicinal, spiritual, and recreational use. Delta-9-tetrahydrocannabinol (THC) is the main ingredient that produces the psychoactive effect… In the US, federal and state laws are, in some cases, contradictory. On a federal level, cannabis is illegal, classified as a schedule 1 drug.”

The authors continue, “Cannabidiol (CBD), another component of the cannabis plant, lacks psychoactive properties and is touted as a treatment for a myriad of conditions and is legal in all 50 states. CBD is sold as an over-the-counter product in many retail facilities including pharmacies, smoke shops, grocery stores, and gas stations.”

Unless the U.S. federal law changes to legalize cannabis, most of these companies, including Hexo, will not be able to increase revenue. Without such increased revenue, Hexo stock cannot make a new sustained move up.

Why Share Price Declined

Hexo listed on the New York Stock Exchange in January 2019. The initial news headlines, when it acquired Newstrike in an all-stock deal worth $250 million, made the company a darling among market participants.

In April 2019, Hexo stock was around $8. However, since then pot-stock valuations collapsed in this much-publicized industry. After all, as an agricultural produce, its price depends on supply-and-demand factors. And those realities were not been kind to pot producers in Canada. Now, Hexo hover below $1.

Like other most companies, Hexo worked on increasing production and becoming one of the top producers in Canada. Yet, without enough sales and revenue to pay for the growth, it simply became a cash-burning machine.

Thus, management resorted to frequent equity issuance. Meanwhile, the initially-applauded Newstrike takeover created significant problems as Newstrike had been operating without full legality.

In late October, the company released results for the fourth quarter and fiscal year ended July 31. It recorded record revenue, thanks to sales in 2.0 products (i.e., edibles and drinks). Yet, it is still loss-making.

Quarter after quarter, shareholders have scratched their heads as they compare metrics in quarterly statements. Even after several years as a public company, Hexo does not have a path to profitability.

The Bottom Line on Hexo Stock

Many readers would remember 2018 and early 2019, when cannabis shares, like Hexo stock, were all the rage. However, those days are long gone and a new sense of reality has set in.

In the U.S., public opinion toward marijuana will possibly continue to liberalize as pot becomes legal in more states. However, federal legalization may be still some time away. As a result, it is too soon to expect cannabis shares to make sustained moves up on the basis of potential legalization.

Currently, Hexo stock remains a high-risk proposition. Those investors who are interested in the cannabis space may consider buying an exchange traded-fund, such as MJ. An ETF in the sector would offer diversification and access to a range of firms that may benefit from growth in the industry. Other fund examples include the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO), the Cannabis ETF (NYSEARCA:THCX), or the Global X Cannabis ETF (NASDAQ:POTX).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil Ph.D. has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination.

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