Why is HEXO Corp. (HEXO) Trading Down 10% This Week?

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October 8, 2019 2:02pm NYSE:MJ

NYSE:MJ | News, Ratings, and Charts

Last Friday’s resignation of Hexo (HEXO) CFO Michael Monahan sent aftershocks across an already shaky cannabis sector, and so far the reactions on Wall Street have been mixed.

Monahan’s resignation seemed to catch investors by surprise, as his hiring was just recently announced back in May. However, the former CFO insists his resignation is for family reasons.

“Since joining HEXO Corp, it has become apparent that this job requires me to spend the majority of my time in Gatineau and in Ottawa. During this phase of rapid expansion, the chief financial officer should be working very closely with all team members, in person,” Monahan said in a statement.

“This isn’t possible for me at this time given my family’s needs and so I have decided to resign. I’ve had a very rewarding time at HEXO and I will continue to assist the company as a consultant to ensure a smooth transition.”

Nonetheless, shakeups within the C-suite tend to make investors uneasy, and analysts responded accordingly. The harshest reaction seemed to come from BofA Merrill Lynch analyst Christopher Carey, who downgraded the stock to underperform, cutting its price target from CA$9 ($6.76) to CA$4 ($3) per share.

“[A] departure that is so abrupt, from a person with CFO experience at other public companies, is concerning, and in our view will leave investors guessing ‘what don’t we know?’ for some time,” Carey said.

“Big picture: while there were already risks for Hexo, we felt they were balanced by a sound core operation and a new CFO who had a chance to regain Street credibility on forecasts/guidance by resetting the bar, with the potential that momentum regained in CQ120 with the launch of value-add formats,” Carey added.

Reacting to the price cut, HEXO stock was down 6.4% on Monday.

But other analysts have been more forgiving. On Monday, MKM Partners analyst Bill Kirk reiterated his buy recommendation of HEXO stock.

“We believe HEXO’s approach to be the working component of expert partners’ products has the best chance of creating a defensible brand (‘Powered by HEXO’),” Kirk wrote in a note to investors.

Kirk still believes that Hexo has the “best chance of creating a defensible brand.” Out of the 8 cannabis stocks that MKM Partners recently began covering, HEXO is one of the only two that received buy rating.

Part of Kirk’s fondness for Hexo comes from the company’s focus on building brand recognition, versus the race to scale which some of its industry peers are geared toward.

The problem with the race to scale is that it consumes capital. By contrast, Hexo touts a healthy balance sheet. According to the Hexo’s most recent earnings report, the company had nearly 189 million Canadian dollars ($142 million) in cash and short-term investments, balanced against little more than CA$30 million ($23 million) in long-term debt.

Comparatively, Kirk is more enthusiastic about Hexo’s strategic partnership with Molson Coors Brewing Co. (TAP), as the company should provide valuable distribution inroads once edibles become permissible in Canada later this year.

On Monday, Kirk reiterated his Buy rating with a CA$12 ($9.02) price target.

HEXO Corp. (HEXO) was trading at $3.67 per share on Tuesday afternoon, down $0.13 (-3.42%). Year-to-date, HEXO has declined N/A%, versus a 9.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

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