Shares of Hexo (NASDAQ:HEXO) (TSX:HEXO) continued to fall on Monday, losing almost another 5% on the day, closing at a 2021 low of $1.73 on the NASDAQ.
Stock in the Canadian cannabis company have lost just over 30% in the last year, dragging its market cap to about US$519 million. The downward trend continued despite the company’s recent acquisition of Redecan, one of the very few profitable Canadian pot producers.
Hexo bought the company in August for C$400 million (US$318 million) in cash and 69.7 million newly issued shares in the marijuana grower.
According to financial disclosures, Redecan generated C$73.6 million (US$58.4 million) in cannabis sales in fiscal 2020, which is in the ballpark of the C$110 million (US$87.4 million) Hexo itself generated in the same 12-month period. The big difference, however, is that Redecan posted a C$11.6-million (US$9.2 million) profit.
Building on that, Redecan posted 2021 first quarter figures of C$24.6 million (US$19.5 million) in sales, which was almost triple what it realized in the same period the previous year. It’s bottom line for the quarter was even more impressive—a C$7-million (US$5.6 million) profit.
This is all good news for Hexo, but investors seemingly are unimpressed.
At the end of August, Hexo co-founder and CEO Sebastien St-Louis said:
“The completion of this transaction is aligned with our corporate growth strategy and will further strengthen our position as a leader in the Canadian cannabis industry, bolstering the combined company as we look towards becoming a top three global cannabis products company and continue on the path towards positive EPS.”
Investor enthusiasm in the Canadian cannabis sector is becoming more and more elusive, despite the good news developments.
Commenting on the failure of many of the major cannabis companies failing to reach profitability, a CIBC analyst last week downgraded price targets on many of the big Canadian weed companies, including Hexo. CIBC downgraded its price target for Hexo to C$5 (US$3.97) from C$6 (US$4.76), which still gives the stock an optimistic upside. Hexo closed in Toronto yesterday at C$2.17 (US$1.72).
MORE Act Another Step Closer
Late last week, a committee in the US House of Representatives made a key move that will ripple through the North American cannabis industry sector going forward.
The Judiciary House Committee voted to approve the MORE Act, or the Marijuana Opportunity, Reinvestment and Expungement Act. Essentially, the legislation—once it passes the House and gets its final approval in the Senate—removes cannabis from the list of controlled substances, earmarks the federal tax charged on the legal sale of the substance to be used for community reinvestment programs and paves the way for individuals who have criminal records related to charges involving cannabis to have those records expunged.
But this act is not the only piece of legislation that will affect the sector. The House also approved a huge defense spending bill that includes a key section—an amendment that will protect banks that do business with state-approved cannabis companies. These institutions no longer face any penalties from federal authorities.
The step forward on the legislative front is characterized as an incremental victory—not an end, but a step towards it.
These moves also mean that the large Canadian cannabis companies that have been jockeying for position at the start line, waiting for federal legalization to fire the starter’s gun in the race to enter the world’s largest market, could soon make a few adjustments that investors might want to keep a close eye on.