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Why Hexo Stock Dropped 7% Today

By Rich Smith – Oct 29, 2021 at 2:37PM

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And why Green Thumb Industries and Charlotte's Web followed it lower.

What happened

Marijuana stocks are in trouble Friday, as shares of Canadian cannabis company Hexo (HEXO -2.45%) tumbled 7% by 11 a.m. EDT after it reported yet another money-losing quarter.

The bad news at Hexo helped pull down shares of peer cannabis companies both larger and smaller, as Green Thumb Industries (GTBIF 0.54%) fell 3.5% and Charlotte's Web Holdings (CWBHF -1.13%) dropped 2.3%.

Chalkboard drawings of a marijuana leaf with accompanying bar, line, and pie charts.

Image source: Getty Images.

So what

Reporting on its fiscal fourth-quarter and full-year 2021 results, Hexo noted that sales grew 43% year over year for the quarter ($38.7 million Canadian dollars) and 53% for the year (C$123.5 million). Hexo boasted that this made fiscal Q4 2021 its "best quarter of sales to date." 

"Best" doesn't mean "profitable," however. Lower in the press release was the fact that the company suffered a net loss of C$68 million in Q4, bringing total losses for the year to C$113.6 million. (In U.S. dollars, that works out to $54.9 million and $91.7 million, respectively -- or per-share losses of $0.18 and $0.30, respectively, when spread out among Hexo's 304.1 million shares outstanding.)

Now what

Hexo didn't go into much detail on the loss, preferring to keep the focus on its growing sales, but investors seem to have noticed.

The fact that Hexo also said it "acknowledges the ongoing concern with its senior secured convertible notes issued on May 27, 2021" may well be a factor that spooked investors this morning. According to the press release, the company

has sufficient funding for ongoing working capital requirements, however, current funds on hand, combined with operational cash flows, are not sufficient to also support funding potential cash requirements under the Senior Secured Convertible Note, investments required to continue to develop cultivation and distribution infrastructure, and the future growth plans of the Company.

Neither Green Thumb nor Charlotte's Web has put out any bad news of its own. On the other hand, earnings reports are due out shortly for both of these Hexo peers. Green Thumb has announced an earnings call for Nov. 10. Charlotte's Web hasn't set a date for its report, but it will probably come out sometime in mid-November since that was the month it reported quarterly results last year. 

Of the two, Green Thumb looks like the cannabis stock with the brighter prospects as Green Thumb has reported positive profits in each of the last four quarters, and analysts predict the company will remain profitable in the current quarter, earning perhaps $0.10 per share, which will put it in a position of strength as nationwide legalization of marijuana approaches. 

The same cannot be said for Charlotte's Web, which has been unprofitable over the past year. Analysts are forecasting a $0.04 per share loss for this quarter, losses for the full year, and even more losses next year. For a company focused primarily on selling an alternative to still-illegal marijuana (i.e., cannabidiol), the closer legalization approaches, the worse the prospects are for Charlotte Web's business.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Charlotte's Web Holdings and Green Thumb Industries. The Motley Fool recommends Charlotte's Web and HEXO Corp. The Motley Fool has a disclosure policy.

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