HEXO Stock: Tilray deal not necessarily a boon for investors
- Hexo (HEXO) the stock may look attractive due to a deal with a well-known cannabis company.
- Still, a closer look reveals that the deal might not be much help for Hexo.
- Investors should consider staying away due to Hexo’s unfortunate financial situation.
Hexo (NASDAQ:HEXO) is a cannabis producer that can generate excitement among people who like to trade cannabis stocks at low prices. However, HEXO stocks are the wrong asset to invest your hard-earned capital in now.
From a technical point of view, it is extremely difficult to build a convincing case for owning shares of Hexo. Shareholders have been burned before, and you don’t need to become another victim.
From a fundamentals-focused perspective, it’s also difficult to hold HEXO stocks with confidence. As we will discover, the company seems to have more outgoing capital than incoming.
There’s also a headline-grabbing financial arrangement to consider. Be careful when trading on the headlines, however – and as a savvy investor, always read the fine print before jumping into a sticky situation.
What’s going on with HEXO stocks?
When a double-digit stock falls below $1, it’s usually bad news from a technical standpoint, as well as a psychological one. If the stock drops below 50 cents, it’s even worse.
Since its peak in 2019, HEXO stock has evolved into a penny stock, which can be informally defined as a stock that represents a small company and trades at less than $5 per share.
This is a classic example of what can happen if you buy during a hype phase. The descent can be as steep as the climb.
Not too long ago, HEXO shares were trading well above 50 cents per share. There was a rally above $5 last year, but that fell apart.
Of course, it might be tempting to embark on a hero’s mission in the name of “buy low, sell high” investing. Just keep in mind, however, that a low stock price is not the same as good value.
Plus, we have to address the elephant in the room: Hexo’s much-vaunted arrangement with another cannabis grower. Tilray (NASDAQ:TLRY).
Tilray’s chairman and CEO called the transaction a “win-win.” However, whether Hexo stakeholders are actually the winners here is debatable.
Under the agreement, Tilray is purchasing up to $211 million of senior secured convertible bonds from Hexo. In other words, Tilray intends to acquire a large portion of Hexo’s debt.
This transaction will not make Hexo’s debt disappear, not at all. Reportedly, the arrangement will provide Tilray with approximately C$20 million in interest payments in the first year alone. Sounds great for Tilray, but not so wonderful for Hexo.
Huge debt with interest payments is not going to help Hexo at all. It is not a company that is in a good financial position to repay its debt.
Consider that in the three months ending January 31, 2021, Hexo recorded a net profit loss of C$20.839 million. Even then, the company’s revenues clearly could not cover capital outflows.
Plus, the fiscal situation gets even worse from there. For the three months ended January 31, 2022, Hexo’s net profit loss climbed to C$710.886 billion. Year-over-year, the company reported increased spending in the categories of sales, general and administrative expenses, and marketing and promotion.
What you can do now
Some traders may have hastily bought HEXO stock simply because they saw a headline about a financial tie to Tilray. They may regret this decision, unfortunately.
Not all partnerships are guaranteed to confer benefits on all parties. It’s easy to see how Tilray stands to gain, as the company will collect interest payments on the debt from Hexo.
As for Hexo, a deal with Tilray is not a quick fix to deep financial issues. Considering the full financial picture, investors in the cannabis market may choose to be cautious and steer clear.
I give HEXO stock an “F” in my portfolio binder.
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As of the date of publication, neither Louis Navellier nor the member of the InvestorPlace research staff principally responsible for this article holds (directly or indirectly) any position in the securities mentioned in this article.