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HEXO: The Next Cannabis Player on the Scandal Radar?

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By the end of last month, HEXO had delivered returns of 11.0% for the year. It was one of the few cannabis companies to have delivered positive returns in 2019. However, this month has been tough for the company.

On October 4, HEXO (HEXO) announced that its CFO, Michael Monahan, had resigned with immediate effect. Following Monahan’s resignation, BofAML (Bank of America Merrill Lynch) double-downgraded the stock. BofAML analyst Christopher Carey wrote in a research note, “Put simply: 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,” as reported by Bloomberg.

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On October 10, HEXO announced its preliminary revenue for the fourth quarter, which was lower than analysts’ expectations. The company blamed the slower rate of new store openings, the delayed approval of Cannabis 2.0 by the government, and pricing pressures for its lower revenue. Its management also withdrew its guidance for fiscal 2020. All these factors have led HEXO’s stock price to fall. As of October 11, the company had lost 35.9% of its stock value in the month.

Why are investors nervous about HEXO?

On October 11, PR Newswire reported that Hagens Berman had announced that it would investigate a possible breach of federal security law by HEXO. It also asked HEXO’s shareholders to get in touch.

Previously, CannTrust (CTST) (TRST) had failed to comply with some Health Canada regulations. Later, investigations led to the removal of the company’s CEO, while its chair was asked to resign. Aphria (APHA) had to face similar allegations related to its investments in Latin America. It set up a special committee to investigate these allegations. Subsequently, the company’s CEO, Vic Neufeld, stepped down from his position.

Whenever an executive employee leaves a company abruptly, investors become suspicious. HEXO stock corrected sharply following the stepping down of its chief brand officer, Adam Miron, in July.

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Analysts’ recommendations for HEXO

This month, CIBC, Canaccord Genuity, Jefferies, Cormark Securities, and PI Financial have all lowered their price targets for HEXO. Also, Eight Capital has downgraded the stock from “buy” to “neutral” and lowered its price target from $12 to $3. However, Jefferies has upgraded the stock from “underperform “to “hold.”

Of the 16 analysts that cover HEXO, 50% are in favor of “buy” ratings, while 43.8% recommend “holds,” and 6.3% recommend “sells.” On October 11, the consensus price target for HEXO stood at 6.31 Canadian dollars, implying a potential upside of 88.3% over the next 12 months.

Peer comparison

  • Of the 17 analysts that follow Aurora Cannabis (ACB), 47.1% are in favor of “buy” ratings. On October 11, the company was trading at a discount of 88.6% to its price target. For analysts’ recommendations, read Aurora Cannabis: Analysts’ Target Price after Its Earnings.
  • Analysts are bullish on Aphria. Of the 12 analysts that cover the stock, 75% have given it “buy” ratings. The consensus price target for the stock stands at 13.60 Canadian dollars, which implies a potential return of 119.1%. Aphria is set to report its first-quarter earnings results tomorrow. For analysts’ expectations, check out Aphria: What to Expect from Its Q1 2020 Earnings.
  • Of the 21 analysts that follow Canopy Growth (CGC) (WEED), 57.1% are in favor of “buy” ratings. The consensus price target for the stock stands at 48.19 Canadian dollars, which implies a 12-month potential return of 87.7%. Recently, Bank of America downgraded the stock. For more info, read Canopy Growth Stock Falls after Downgrade.

YTD stock performance

YTD (year-to-date), HEXO stock has fallen 27.9% as of October 11. During the same period, its peers Aurora Cannabis, Aphria, and Canopy Growth have lost 28.3%, 21.1%, and 29.9%, respectively. Concerns over vaping-related deaths and expectations of slower growth in the second half of 2019 have put the entire cannabis sector under pressure.

For more cannabis-related news and updates, be sure to check out 420 Investor Daily.

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