- Hexo (HEXO) stock might seem appealing due to an arrangement made with a well-known cannabis company.
- Yet, a closer look reveals that the agreement might not be of much help to Hexo.
- Investors should consider staying on the sidelines due to Hexo’s unfortunate financial situation.
Hexo (NASDAQ:HEXO) is a cannabis producer that may spur excitement among folks who like to trade low-priced pot stocks. However, HEXO stock is the wrong asset to invest your hard-earned capital into now.
From a technical standpoint, it’s awfully difficult to build a convincing case to hold shares of Hexo. The stockholders have been burned before, and you don’t need to become another victim.
From a fundamentals-focused angle, it’s also hard to hold HEXO stock with confidence. As we’ll discover, the company appears to have more capital flowing out than in.
There’s also a headline-grabbing financial arrangement to consider. Be careful when trading based on headlines, though — and as an informed investor, always read the fine print before jumping into a tricky situation.
What’s Happening With HEXO Stock?
When a double-digit stock falls below $1, that’s typically bad news from a technical standpoint, as well as psychologically. If the stock goes below 50 cents, that’s even worse.
Since it topped out in 2019, HEXO stock has become a penny stock, which can informally be defined as a stock that represents a small company and trades for less than $5 per share.
This is a textbook example of what can happen if you buy during a hype phase. The descent can be just as steep as the ascent.
Not long ago, HEXO stock traded well above 50 cents per share. There was a rally above $5 last year, but that fizzled out.
Sure, it might be tempting to embark on a hero’s mission in the name of “buy low, sell high” investing. Just bear in mind, though, that a low stock price isn’t the same as a good value.
Also, we must address the elephant in the room: Hexo’s much-touted arrangement with fellow cannabis producer Tilray (NASDAQ:TLRY).
Tilray Chairman and CEO called the transaction a “win-win.” However, whether Hexo’s stakeholders are actually the winners here, is debatable.
Big Debt Load
According to the agreement, Tilray is buying up to $211 million of Hexo’s senior secured convertible notes. In other words, Tilray intends to acquire a large amount of Hexo’s debt.
This transaction won’t make Hexo’s debt go away — not at all. Reportedly, the arrangement will provides Tilray with roughly 20 million CAD in interest payments in just the first year. That sounds great for Tilray, but not so wonderful for Hexo.
A sizable debt burden with interest payments isn’t going to help Hexo at all. This isn’t a company that’s in a good financial position to pay off its debt load.
Consider that in the three months that ended Jan. 31, 2021, Hexo posted a net earnings loss of 20.839 million CAD. Even back then, the company’s revenue clearly couldn’t cover the capital outflows.
Moreover, the fiscal picture gets even worse from there. For the three months ended Jan. 31, 2022, Hexo’s net earnings loss ballooned to an eye-watering 710.886 billion CAD. Year-over-year, the company reported spending increases in the categories of selling, general and administrative, as well as marketing and promotion.
What You Can Do Now
Some traders might have hastily purchased HEXO stock simply because they saw a headline about a financial tie-up with Tilray. They may come to regret that decision, unfortunately.
Not all partnerships are guaranteed to confer benefits to all parties. It’s easy to see how Tilray stands to gain as the company will collect debt interest payments from Hexo.
As for Hexo, an agreement with Tilray isn’t a quick fix for the bottom-line financial concerns. Taking the full financial picture into view, cannabis-market investors can choose to be cautious and just stay on the sidelines.
I give HEXO stock an “F” in my Portfolio Grader.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.