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Another Cannabis Stock Is Disappointing Investors

By David Jagielski - Oct 29, 2019 at 1:24PM

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HEXO has been full of bad news lately.

Cannabis investors are too familiar with disappointment these days as many pot companies have been finding it hard to avoid publicity for all the wrong reasons. Whether it's scandals or disappointing quarterly results, cannabis investors have had to deal with many challenging issues this year.

However, there's one company that's been running into issue after issue lately, and that's HEXO (HEXO 5.87%). In just the past month, the stock has lost more than 40% of its value and here's why.

A resignation and a retreat from an aggressive forecast

What seemed to initiate the sell-off of HEXO's shares was news that its chief financial officer was resigning from his position. While there could be reasons for the departure that are unrelated to problems at the company, it's still unsettling for investors given that it's a key role and that he was just hired in May of this year. 

People leave their jobs all the time, and they aren't always employed for long durations. However, exacerbating this news was that the company was also backing away from its forecast. For the fourth quarter, the company was now expecting to generate between 14.5 million Canadian dollars to CA$16.5 million, well shy of its previously anticipated CA$26 million for the quarter.

But that wasn't even the worst of it. Not only were numbers for the upcoming quarter expected to come in much lower, but HEXO was also pulling its ambitious forecast for 2020. It initially raised eyebrows when it set fiscal 2020 revenue expectations for CA$400 million. 

Cannabis plant

Image source: Getty Images.

It was an aggressive target from the start, especially given that the company now projects sales for fiscal 2019 at no more than CA$48.5 million. 

While it would have benefited from its beverage deal with Molson Coors Canada, it was going to be an uphill battle to get to CA$400 million, with or without the benefit of beverages and edibles. The decision by CEO Sebastien St-Louis to withdraw the forecast was a result of the conditions in the market. In the press release announcing the move, St-Louis said "given the uncertainties in the marketplace, we have determined that it is the appropriate course of action. We are also placing a greater focus on profitability. We are evaluating our plans and operations to see where we can be even more efficient." 

With investors focusing more on profits as of late, the company may have weighed the aggressive growth with the costs that would have been incurred along the way, recognizing that it may not have translated into a stronger share price. But either way, the stock has still taken a beating.

Is HEXO running out of money?

In a further sign that things may not be going as planned, HEXO announced it would also be cutting 200 jobs. What's surprising is that among the cuts are executive positions and that its chief manufacturing and marketing officers would be leaving as well. 

This comes after the company announced a private placement of $70 million, which it says it will use for "working capital and general corporate purposes."  These recent moves suggest that there may be some cash concerns at HEXO.

Where there's smoke, there's fire

And there's been a lot of smoke coming from HEXO lately. Things were supposed to be much more promising over the next 12 months. Instead, those high expectations have now been thrown out. There are many question marks surrounding the company today, making it too risky of a stock to invest in, at least for now.

HEXO is, unfortunately, just the latest marijuana stock to have lost the trust of investors and there's no sign that its free fall will end anytime soon.

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