Hexo: Buy or Sell after Reverse Stock Split?

When a company opts for a reverse stock split, it doesn’t inspire much confidence in investors. Experienced investors generally view reverse stock splits as a red flag and the selling pressure on the stock increases. Hexo Corp [stock_market_widget type=”inline” symbol=”HEXO” template=”basic” color=”default”] (HEXO) recently announced a reverse stock split in an 8:1 ratio. The company is listed on the New York Stock Exchange which doesn’t allow any stock to be listed if they have been trading for less than $1 for over 30 days. Hexo hasn’t traded over $1 since June 12. The company is going to hold a meeting on December 12 to have Hexo shareholders vote on the plan. The question remains – is Hexo a buy or sell after the reverse stock split?

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Hexo’s Fourth Quarter Numbers

Hexo disclosed its results for the fourth quarter and fiscal year ended July 31, 2020. The company reported its highest-ever gross revenue at $36.1 million, up 17% from Q3 of fiscal 2020, and 76% from Q4 2019. Net revenue rose 23% on a sequential basis and 76% year-over-year to $27.1 million. However, these gains in numbers were completely offset by a $106.2 million operating loss compared to the prior-year figure of $63 million. See HEXO’s latest investor deck below:

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Hexo stock is down over 60% this year. From the looks of it, the company has very little to offer investors. But can Hexo still offer cannabis investors any upside?

In Truss We Trust

Hexo recently forged a partnership with Molson Coors. Together, they’ve recently launched a cannabis-infused beverage brand called Truss Beverage Co. This is part of their 2.0 products that include cannabis-infused vapes, edibles and beverages. Canada had passed a law in late 2019 that legalized the sale of cannabis-derived products.

These products have much higher profit margins than the plain old pot. There is a huge untapped demand for these products and if a company is able to harness this market, it spells cha-ching!

According to the company’s earnings call report, “In early August, Truss began rolling out its range of THC and CBD-infused beverages across Canada… it’s designed to appeal to both current cannabis consumers and those who are just beginning to explore the category.”

The brand has sold well and as of October 2 and Truss had shipped approximately 0.5 million units of ready-to-drink beverages. In three months between August to October, Hexo claims that Truss has become the market leader in the CBD-beverage space.

Outside of Canada, Hexo plans to tap the Colorado market in the USA. As more US states legalize pot for recreational and medicinal use, it is not unreasonable to expect demand for Hexo’s products to go up.

Bottom Line: Is Hexo Stock a Buy or Sell?

The only reason to place a bet on Hexo is the growth potential of Truss. The numbers on Truss and 2.0 products were pretty much the only bright spots on an otherwise unappealing earnings call. The joint venture with Molson Coors can serve as a massive catalyst to drive Hexo’s growth if it wants to grab market share in this space in Canada.

We believe it is a matter of time before similar markets in the U.S. open up. When that happens, Hexo’s experience and expertise in Canada will hold it in good stead. The question is whether Hexo can sustain itself long enough so that it can take advantage when that happens.

A prudent investor would wait for additional updates from Hexo. The December meeting where the shareholders vote on the reverse stock split would be a good start. If Hexo can report good numbers for the months of October-January in the 2.0 market, it would be worth adding the cannabis stock to your portfolio. Until then, we suggest you hold on. It looks like a bargain at these levels but the thing with bargains is that they go wrong more often than not.

Hexo: Buy or Sell after Reverse Stock Split?

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Hexo: Buy or Sell after Reverse Stock Split?