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2 Reasons To Avoid Hexo

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build your wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I want to show you 2 Reasons To Avoid Marijuana Stock Hexo so you can continue building your wealth safely.

2 Reasons To Avoid Hexo

Last year, Hexo (HEXO) was one of the best known and most bought pot stocks in the world.

It hit its all-time high share price of $8.40 per share on April 30th, 2019 due to its then current and planned cannabis and cannabis related products like CBD oils, flowers, and vapes.

The company even won many awards in 2017, 2018, and 2019 for its products.  And these things combined led to Hexo shares skyrocketing.

Since April 2019 its been all down hill for the company though due to poor operations and unprofitability

This led its share price to fall 91.8% from its all-time high at the end of April 2019 to $0.69 per share as of this writing in September 2020.

Here are the 2 Reasons To Avoid Hexo Stock now…

  1. It’s Unprofitable

In the most recent quarterly data Hexo was unprofitable on an operating income, net income, and free cash flow basis… To a massive degree.

  • Its operating profit margin in the trailing twelve months (TTM) period is negative 249.3%.
  • Its net income margin in the same period is negative 394.3%.
  • And its free cash flow to sales (FCF/Sales) margin in this same time was negative 449.3%.

EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.

Hexo is one of the most unprofitable companies I’ve ever evaluated.

To illustrate this…  In the last year alone Hexo spent – lost – $232.1 million in free cash flow to generate only $51.7 million in sales.

This means it loses $4.49 every time it makes $1 in sales over the last 12 months.

You want profitability margins to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.

For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.

And I look for stocks FCF/sales margins above 5% on a consistent basis.

Why these numbers?

Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit and net margins above 10% over extended periods.

And far fewer than 5% of all companies consistently have higher FCF/sales margins than 5% on a consistent basis too.

When a company surpasses these thresholds, it means the company is a great operating business.

And these profits allow the company to continually reinvest in and grow its businesses in a healthy way.

But if a company doesn’t surpass these thresholds – like Hexo – this leads the company to having less money to reinvest in the business to continue competing well.

Which also leads to other problems…

2. Massive Share Dilution

In 2014 when it went public, Hexo had 2 million shares outstanding… Now it has 266 million shares outstanding.

This is a 132X or a 13,200% increase in 6 years.

It had to sell these new shares to generate cash so it can continue operating because its not making any money from its day to day business.

Think of share dilution like a pizza…

When Hexo issues more shares, the same size of pizza stays… But more people are around to eat it so the piece of pizza you eat gets smaller and smaller the more shares it issues.

If a company keeps doing this over long periods like Hexo, the same size of the pizza remains, but eventually you’ll get to eat almost none of it yourself.

In this case, Hexo shares are now 13,200% less valuable now than they were in 2014 due to this dilution.

This is the main reason its shares have cratered since 2019… Continued massive share dilution combined with huge unprofitability.

And this problem isn’t going anywhere anytime soon due to massive competition in the cannabis industry in Canada.

For these two reasons, I recommend avoiding its stock… Because it could be on its way to $0 barring a miraculous recovery.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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