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Why HEXO Tumbled Nearly 9% Today

By Eric Volkman - May 11, 2021 at 6:35PM

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Hint: It starts with the letter D and rhymes with "bilution."

What happened

HEXO (HEXO 7.75%) was nobody's idea of a euphoric marijuana stock on Tuesday. The shares fell by 8.7% on the day following the announcement of a new, potentially dilutive capital-raising move by the company.

So what

HEXO has launched an at-the-market equity program allowing it to sell up to 150 million Canadian dollars ($124 million) worth of its common stock. Sales of the newly minted shares can, and almost certainly will, take place from time to time at HEXO's discretion.

Smoke emanating from a marijuana flower.

Image source: Getty Images.

The company said in its prospectus for the program that it intends to use the proceeds it reaps "for general corporate purposes." These might include an acquisition it is considering in Colorado and a follow-up retrofitting and property improvement to same.

It could also invest into improving the production lines at a company facility in Belleville, Ontario. Other potential uses include acquisitions and expenditures related to its February acquisition of peer weedie Zenabis. It didn't provide more details of the potential Colorado deal.

If HEXO approaches the high end of that CA$150 million, it would run the risk of diluting the stock significantly. At the moment, the marijuana company's market capitalization for its New York Stock Exchange-listed shares is a shade over $800 million.

Now what

Investors have gotten used to dilution in the ever capital-hungry and habitually loss-making cannabis industry. But that doesn't mean they're happy about it; with every new unprofitable quarter, their patience wears ever thinner for struggling pot purveyors like HEXO.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp. The Motley Fool has a disclosure policy.

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Stocks Mentioned

HEXO Stock Quote
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