Hexo Corp (NYSE:HEXO) continues to feel the impact of its underwhelming Q3 earnings, a slower than expected recreational cannabis market in Canada, and concern over corporate leadership in the industry. Hexo stock is down 13% from Monday’s open, and is now trading right around the $4 mark.
This continues a slide that began after HEXO hit an all-time high of $8.28 in April, and worsened after another quarter of red ink and the departure of its co-founder from his executive role.
HEXO Underwhelmed in Q3
On June 12, HEXO reported Q3 earnings and failed to impress investors. The company missed badly on revenue ($13 million CAD compared to the $14 million analysts were looking for) and the red ink was worse than expected, with a quarterly loss of $7.75 million — up from a loss of $1.97 million the previous year. The company announced plans to enter the U.S. CDB market through a joint venture with Molson Coors Brewing Co (NYSE:TAP), but that is fast becoming a crowded field and investors weren’t overly impressed. Hexo stock dropped over 8% on the results.
HEXO is expected to report Q4 earnings in September.
Investor Nervousness Around Cannabis Industry
Many investors piled onto Canadian cannabis stocks over the past year, looking for the legalization of recreational pot in Canada to result in a boom market. The reality has been a little harsh for some.
Slower than expected initial sales of recreational pot led to cannabis stocks tumbling in the days after recreational marijuana use was legalized in Canada last October. There were no line-ups at Canadian cannabis retailers and product shortages were reported as a result of glitches in distribution and production. While the situation has improved, recreational pot still isn’t exactly flying off the shelves in Canada.
Adding to investor unease, 2019 has seen considerable drama among Canadian cannabis companies, and HEXO has not been immune.
In January, the CEO of Aphira (NYSE:APHA) left the company amid allegations of improprieties regarding acquisitions in Latin America. On July 10 the CEO and co-founder of Canopy Growth (NYSE:CGC) was forced out of his role, and didn’t leave without igniting controversy over his dismissal.
Just days later on July 18, HEXO’s co-founder stepped down from his role of Chief Brand Officer, although he retained his seat on the board.
The most recent headlines were centered around CannTrust Holdings (NYSE:CTST), which became the center of Health Canada and Ontario Securities Commission investigations over illegal cannabis cultivation at one of its facilities. The fallout there has included the firing of the CannTrust Holdings CEO and the forced resignation of the company’s co-founder and chairman.
The series of leadership shakeups and missteps has certainly not helped cannabis stocks in 2019, although the corporate transitions are expected to put many of these companies in stronger positions for the long term.
How Does Hexo Stock Performance Compare to Cannabis Cohorts?
Even after this week’s 13% drop and a decline in Hexo stock price of around 40% since it reported Q3 earnings in June, HEXO is performing reasonably well on the year compared to its fellow Canadian cannabis stocks. Year-to-date growth is 6.5% for HEXO, while Aurora Cannabis (NYSE:ACB) is up 11% and Aphira has gained over 8%.
However the biggest of the Canadian cannabis producers Canopy Growth has lost 13% since the start of the year. CannTrust Holdings — the company that kicked off the latest round of concern about the industry — has dropped some 64% so far in 2019.
The question for HEXO investors is whether the company’s Q4 earnings are going to going to be as underwhelming as Q3’s were. If so, the Hexo stock price slump that started in April could well continue through the fall. And HEXO doesn’t have far to drop before it goes into the red for 2019…
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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