Based in Canada, Hexo (NASDAQ:HEXO) seeks to be a cannabis market contender. It’s perfectly fine to be bullish on the North American cannabis industry, but HEXO stock is a no-go for cautious investors.
The promise of marijuana-market wealth was in full effect just a few years ago. Then came Covid-19, supply-chain issues and the disappointing rollout of Cannabis 2.0 (edibles, vapes and so on). Among the hardest hit businesses during the cannabis industry’s decline was Hexo, a once-promising market contender.
As Hexo struggles to turn a corner, there’s a cautionary tale to be told here. The old saying goes, “Cut your losses quickly,” and Hexo’s loyal stakeholders might have to learn a painful lesson as a seemingly cheap pot stock could soon get much cheaper.
What’s Happening with HEXO Stock?
The wealth destruction has been staggering as HEXO stock, valued at around $7 a year ago, can’t even stay above $1 lately. Not long ago, the stock hovered near 27 cents.
Meanwhile, Hexo’s market capitalization has shrunk below $110 million. Even among a slew of struggling stragglers in the cannabis market, Hexo’s fall from grace has been gut-wrenching.
Is delisting a possibility? Traders should consider this question, as the Nasdaq exchange has sometimes issued delisting warnings when stocks trade below $1 for an extended period of time.
Meanwhile, Hexo’s bottom-line financials are in shambles. During the company’s most recently reported quarter, Hexo sustained a net earnings loss of roughly $690.25 million. That figure was around $116.91 million just three months earlier.
Clearly, Hexo isn’t on the right fiscal path. Investors have a right to ask: Is the company taking clear and convincing action to climb out of its deepening financial hole?
Not Much Consolation There
To help answer this crucial question, we can check to see what Hexo’s been up to lately. Apparently, as part of the company’s “strategic plan,” Hexo will “close its Belleville facility and transition its operations to other sites.”
This doesn’t inspire much confidence, does it? One has to wonder whether the Belleville facility was meeting its financial objectives.
Unfortunately, around 230 employees will be impacted by this development. It’s probably not much consolation that Hexo is “offering career counselling and other transitional services” to the affected employees.
So, what else has Hexo been up to? Evidently, the company is launching an at-the-market equity program which will allow Hexo to issue and sell up to $40 million (or the equivalent in Canadian currency) worth of shares.
It would require some strenuous mental gymnastics to spin this as good news. The obvious concern here is share dilution. As InvestorPlace contributor Mark R. Hake put it, “this equity sales program is going to dilute the hell out of shareholders.”
Moreover, Hake calculated that if Hexo raises “$40 million as announced, that will dilute existing shareholders by at least 30% (i.e., $40 million/$134 million and likely closer to one-third).”
What You Can Do Now
All in all, Hexo is in a difficult financial situation and issuing shares won’t likely be an effective long-term solution. Ultimately, Hexo will need to prove its viability as a business. The road to recovery, if recovery actually happens, won’t be a smooth one.
HEXO stock, therefore, could continue on its relentless downward slide. Prospective investors should simply avoid Hexo altogether and seek a better risk-to-reward profile elsewhere.
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.