Weed stocks plummet after Canadian cannabis company Hexo withdraws its profit guidance for 2020
- Weed stocks fell on Thursday after Hexo, a Canadian cannabis company, withdrew its full-year revenue guidance at an investor event Thursday, citing market uncertainty.
- Shares of Hexo fell as much as 26% on the news. The stocks of Tilray, Aurora Cannabis, Canopy Growth, and Cronos also slipped.
- The weed industry is facing increased uncertainty and the environment will likely continue to be difficult, according to W. Andrew Carter, an analyst at Stifel.
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Weed stocks are not going high today.
Shares of Tilray, Canopy Growth, Aurora Cannabis, and Cronos fell sharply after Hexo, another Canadian cannabis company, withdrew its revenue guidance for the year because of uncertainty and difficulty in the market.Here's how much each company is down today:
Hexo's Thursday announcement is "another headline damaging the industry's credibility," wrote W. Andrew Carter of Stifel in a Thursday note on the cannabis industry. "We believe the macro environment will continue to be difficult."
There've been a number of events recently that have weighed down shares of cannabis company stock, Carter wrote.
One is that companies are facing increasing pricing pressure as competition ramps up, which is impacting sales. In its preliminary update for the full year, Hexo suggested it now expects C$14.5 million to C416.5 million in revenue, below the consensus estimate of C$24.8 million and the guidance of C$25.9 million it offered earlier in the year.
In addition, the vaping epidemic in the US has spilled over into Canada, Carter wrote, especially after some regulators in the US banned or implemented harsher rules around vapor products. "Now, all eyes are on Health Canada to see how the federal regulator will handle this category," Carter wrote.
While there's limited potential for a long term ban of vapes, Carter writes that Health Canada will likely scrutinize vapes more, which could add costs or delays. The provinces could call for regulatory action as well, he said.There are two companies that Carter thinks stand a better chance of weathering the storm of sector weakness - they are Canopy Growth and Cronos Group. Both have strong cash positions, Carter wrote, of roughly C$3 billion and C$2 billion, respectively. This allows "each company to continue investing aggressively behind their businesses and to capitalize on any opportunities," Carter said.
Canopy Growth also recently named David Klein, the executive vice president and chief financial officer of Constellation Brands, as Chairman of its Board of Directors. This is a positive, Carter writes, as Constellation has affirmed its commitment to the cannabis company after a few rocky months that led to the abrupt exit of former CEO Bruce Linton.
"In this difficult category with a tainted history, the governance models for both Canopy Growth and Cronos Group are differentiators with boards that provide key assurances to other investors," Carter wrote. They also sport the ability to take quick, decisive action, he said.