Why Oppenheimer Cut HEXO’s Rating

HEXO falls

Yesterday, HEXO (HEXO) ended the day about 4.5% lower after Oppenheimer cut the company’s ratings to “perform” from its previous “outperform” rating. HEXO was one of the best performers among the Canadian cannabis companies with a YTD return of 53%, which is still impressive when compared with Tilray (TLRY), which is in the negative territory YTD.

Oppenheimer’s decision to cut HEXO’s ratings was fueled by the expectations that HEXO’s margins will face downward pressure due to pricing issues. Oppenheimer cut the company’s gross margins to a low to mid 40% from its previously forecasted gross margin of 50% for fiscal 2020 and 2021. According to Oppenheimer, HEXO is not focusing on the relatively profitable medical cannabis market.

In contrast, many companies like Aurora Cannabis (ACB), Tilray (TLRY), and Canopy Growth (WEED) have been heavily focusing on the medical cannabis market and are actively looking to grow their respective footprints in the European medical market. For example, just yesterday, Tilray announced that it imported oral solutions for medical use into the UK.

IIPR rises

Yesterday, most of the cannabis stocks ended in the negative territory except for Innovative Industrial Properties (IIPR), which gained about 5.3%. Unlike other Canadian cannabis players, IIPR has been on an upward trend with the stock closing at $131 yesterday. IIPR is a specialized REIT (real estate investment trust) that deals with real estate related to the cannabis industry primarily in the US. Real estate for cannabis could include retail space, cultivation, and storage facilities. Despite HEXO not focussing on medical cannabis as per Oppenheimer, it does have an international strategy.