HEXO (TSE:HEXO) will likely report its third-quarter earnings before the market opens on June 11. In the first five months of this year, HEXO has lost 58.9% of its stock value. Overall, the company’s weak second-quarter performance, rising debt, weaker cash position, and concerns about dilution led to a fall in the company’s stock price. Meanwhile, there has been a sudden increase in investors’ interest in the stock. On Monday, HEXO rose 44.4%, which took its returns for the month to 83.5%. Let’s look at the reasons for the sudden spike in HEXO’s stock price.
Cannabis space becomes more attractive
After underperforming the broader equity markets for some time, cannabis stocks have been recovering in the second quarter of 2020. Quarter-to-date, the S&P 500 Index has increased by 25.1%. Meanwhile, the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has increased by 36.8% during the same period. Many cannabis players blamed the slow rollout of new stores in some of the prominent provinces in Canada for their weak sales. Now, these states have taken appropriate steps to expand their retail footprints. The Canadian government imposed restrictions amid the COVID-19 outbreak. Meanwhile, medical cannabis was classified as “essential.” Dispensaries were allowed to operate during the lockdown. Most of the provincial governments even allowed recreational cannabis sales. All of these factors led to a rise in cannabis stocks.
What’s driving HEXO?
Amid the restrictions, many businesses were closed in the US and Canada, which led to large scale layoffs. The higher unemployment rate lowered customers’ disposable income. So, customers have been moving towards cheaper cannabis products. Meanwhile, HEXO introduced its value brand, Original Stash, in November 2019. Customers shifting to cheaper products could drive the company’s sales. In the first five months, HEXO underperformed its peers and lost 58.9% of its value. Meanwhile, Canopy Growth (TSE:WEED), Aurora Cannabis (NYSE:ACB), and Aphria (NYSE:APHA) fell by 11.4%, 42.6%, and 14.3%, respectively. Sales growth expectations and the stock’s underperformance have driven HEXO’s stock price this month. Let’s look at analysts’ expectations from the quarter and their recommendations.
Analysts’ expectations from HEXO
For the third quarter, analysts expect HEXO to report revenues of 19.9 million Canadian dollars. The revenues represent a rise of 17.2% from 17.0 million Canadian dollars in the second quarter. They also expect the company’s EBITDA losses to improve from the previous quarter. For the same period, they expect the company’s EBITDA losses to fall from 10.3 million Canadian dollars to 8.7 million Canadian dollars.
Overall, analysts are bearish on HEXO. Among the 14 analysts, 50% recommend a “hold,” while 50% recommend a “sell.” As of June 8, analysts’ consensus target price was 1.25 Canadian dollars, which represents a fall of 19.6% from its current stock price. To learn more, read Why Lorne Steinberg Thinks Hexo Is a Pass.