As we begin 2020, Hexo (NYSE:HEXO) stock continues to confound analysts who are predicting its demise. However, that doesn’t mean the stock is out of the woods. The HEXO stock price opened the first trading day of the new year nearly 16% below its $1.96 closing price of Dec. 24. Looking at the bigger picture, though, HEXO stock is down just over 80% since the beginning of May 2019.
The latest issue for Hexo was its announcement of a definitive agreement on Dec. 26, in which the company would receive $25 million on the sale of nearly 15 million shares. Institutional investors will buy the shares at an offering price of $1.67, a 14% discount to its market price at the time. The offering also includes warrants to purchase just under 7.5 million shares at $2.45 per share.
Hexo is not the only cannabis company to raise cash through equity offerings. However, at a time when investors are hoping to see stability and growth, this is another reminder that not every cannabis stock will be part of the industry’s future.
Investors Are Questioning Hexo’s Plan
If you’re a fan of the National Football League, this is a bittersweet time of year. When your favorite team is in the playoffs, it’s great. But when they’re not, it can be a time of change. That’s because the end of a season is a time when coaches and other executives are fired as teams embark on a new plan.
The skeptic in me is always reminded that a new plan, in some cases, is just a play for time. The key, though, is always in the execution — and maybe a little bit of luck.
For the less sports-minded among us, forgive the analogy. However, I think you’ll find it helpful when thinking about Hexo stock. The cannabis company is facing the very real threat of its stock being delisted if it can’t break out of the nosedive that’s it’s been in since May of last year.
Their latest “reboot” involves the aforementioned stock offering that has bought it time and necessary capital. The question, however, is whether or not there is an actual plan in place, or if the company is biding its time until it has to declare bankruptcy.
Is Hexo’s Plan Simply More of the Same?
At the core of the company’s plan is Cannabis 2.0. This is the long-awaited shift into a retail market for edibles, vapes and other products that are less dependent on the dry flower product. However, the retail market in Canada, and particularly Ontario, has not seen the expansion that is central to generating sales and squelching the black market.
The company is also banking on its joint venture with Molson Coors (NYSE:TAP). And, as my InvestorPlace.com colleague Will Ashworth points out, Hexo is well-positioned to start selling THC and THC/CBD drinks. Ashworth writes, “Hexo has spent millions of dollars to get a state-of-the-art beverage manufacturing facility that already has CBD beverages in the pipeline. With this, the hope is to sell THC and THC/CBD drinks under several brands starting in the calendar year 2020. ”
However, any value for shareholders will only be realized if Hexo can stop the bleeding in its core cannabis operation.
What’s Going to Happen With Hexo Stock?
Hexo missed on expectations in 2019. At the beginning of the year, companies like Hexo could make the argument that investor expectations were too high. However, as the year drew to a close, investors set a low bar — and Hexo still could not jump over that bar.
So, I can certainly forgive investors who are not willing to take Hexo at its word. The company has been guilty of overpromising in 2019.
As I see it, though, Hexo’s plan could work. It needs a lot of things to go right, but maybe time is finally on its side.
But for now, call me a skeptic. I’ve been hearing cannabis companies say “this time it’s different” for about six months now. So, while I don’t see the company’s first quarter earnings as make or break, I do think investors can avoid the stock until they see whether this plan is viable or simply more of the same.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.