HEXO stock is in the red today after Stifel analyst W. Andrew Carter initiated coverage on HEXO Corp (TSX:HEXO) (NYSE:HEXO) with a 'sell' rating and a price target of a $1.15.
Stifel Bearish on HEXO Stock
Carter writes that the $1.15 target price and sell rating reflects Stifel's position that the Quebec pot producer has "precarious positioning" in Canada. He continues to say that HEXO's ongoing cash crunch and a management "credibility gap" will be difficult to overcome, and there is limited potential to drive the "robust growth outlined by the company."
Carter argues that management's persistent touting of the company's growth capabilities means institutional investors will not give them any benefit of the doubt, which would mean depending on the market to attract enthusiasm in HEXO stock, something which may prove difficult in the current environment. Carter also outlined a "liquidation scenario" that values HEXO shares at $0.84 and said that the company's exposure to Quebec has created barriers to growth because policymakers have enacted "incremental restrictions limiting the growth potential of the category."
Carter is not the only analyst to turn pessimistic on the prospects of HEXO. Back in January, the stock tumbled to a new low after MKM downgraded it from a 'buy' to 'neutral' following news that the company was being sued for breach of contract by MediPharm Labs (TSX:LABS) (OTCQX:MEDIF) relating to an outstanding payment of C$9.8 million. This outstanding debt is likely a contributory factor in the "credibility gap" referenced by Carter.
Last month, Jefferies analyst Owen Bennett downgraded HEXO stock to 'underperform' from 'hold', with a price target of $1.00, down from $1.90, albeit for slightly different reasons than the previously mentioned analysts. Bennett believes that the gross margin benefit from Cannabis 2.0 products “may be nonexistent early on,” products which HEXO has heavily invested in, with 38 patents filed at the end of the most recent quarter, and plans to launch a range of infused beverages through a partnership with Molson Coors (NYSE:TAP) in the first half of 2020.
HEXO stock is currently trading for $1.30 in Toronto, down almost 90% from a peak of $11.11 last April. With equity markets in turmoil as a result of the outbreak of the coronavirus, the fallout from which is likely to be felt for a number of months, it could be a difficult year ahead for HEXO.
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