Cannabis Stocks Crumble, HEXO (TSE:HEXO) Drops Guidance

ByMathieu Litalien Published On:

If you thought the legalization of edibles would save the cannabis industry – think again. This morning’s news from HEXO Corp (TSX:HEXO) is yet another shot across the bow, and Canadian stocks in the cannabis sector are getting hammered yet again.

Hexo Corp (TSE:HEXO) drops guidance

Let’s recap the disappointing news from HEXO, viewed as one of the most reliable companies in the sector. On Friday of last week, the company announced the abrupt retirement of the company’s Chief Financial Officer (CFO).

In isolation, there was nothing special about the announcement – resignations happen all the time.

Unfortunately, resignations in the cannabis industry have rarely been a good thing as they are almost always a result of (or followed by) a negative headline.

Look at the resignations across the industry over the past year and you will recognize this pattern.

Friday’s news should have been a warning sign to investors. After all, releasing news after the bell on a Friday is typically a strategy management use to gain the least amount of attention. The other shoe dropped before the bell on Thursday.

HEXO released preliminary fourth quarter earnings that were nothing short of disastrous. Management estimates that fourth quarter revenue will come in at $15.5 million, down from the $31.8 million in predicted just last quarter.

There’s no excuse for Hexo Corp

There is no sugar-coating this number, it expects to miss it’s own guidance issued only a few months ago by more than 50%.

The explanation?

“Lower than expected product sell through” and “slower than expected store rollouts, a delay in government approval for cannabis derivative products and early signs of pricing pressure are being felt nationally”.

To make matters worse, the company pulled fiscal 2020 guidance for annual revenue of $400 million.

The result wasn’t pretty and HEXO lost 23.55% of its value on Thursday.

Canadian cannabis stocks suffered on a whole

Other notable players followed suit. Aurora Cannabis (TSX:ACB) and Canopy Growth Corp (TSX:WEED) each lost approximately 10% and Aphria (TSX:APHA) lost 14% of its value.

It is full-on carnage as the industry is trying to recover from several high-profile mishaps. From Aphria’s questionable acquisitions, the firing of Canopy Growth’s CEO and CannTrust’s (TSX:TRST) licence suspensions, cannabis stocks can’t get out of their own way.

In 2019, the Canadian Marijuana Index has lost 41% of its value and it has been in a steady downtrend since the month of March. It is also down by approximately 70% from its 52-week high achieved in October of last year.

There has yet to be a cannabis company that has consistently met revenue and profitability estimates. In fact, all the companies mentioned today have missed more often than not. We’ve said it many times before, and we will say it again – the industry remains speculative at best, so if you’re just learning how to invest, you may want to avoid the sector. And there’s a potential for a vaping ban to hurt the industry even more.