Cannabis Watch: Hexo stock slides another 4% to weigh on cannabis sector after job cuts prompt downgrade

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Hexo Corp. stock fell another 4% Friday, bringing its weekly losses to 12%, after CIBC downgraded the stock and said the 200 job cuts announced Thursday were the latest sign of the challenges facing the Quebec-based cannabis company.

“Compressed margins, lower Quebec market share (and a less attractive Quebec contract), management credibility issues, and a capital raise all serve as reasons to believe that both operations and sentiment could worsen from here,” analysts John Zamparo and Krishna Ruthnum wrote in a note to clients.

The analysts cut their stock price target to C$3 ($2.30) from C$4. Investors have been bullish on Hexo HEXO, -4.96% HEXO, -5.44%  for a number of reasons, including its joint venture with Molson Coors Canada, which offered the backing of a strong consumer packaging goods partner, they wrote.

See also: College students are taking their schools to court over campus marijuana use

The company had a more attractive balance sheet than peers at about C$230 million in net cash, and the Quebec purchase contract was presented as one that would guarantee volumes for years, they wrote. Hexo was awarded a three-year contract in September of 2018 to manage a warehouse and distribution center for Quebec adult-use webstore orders. Quebec is Canada’s second-most populous province with about eight million people.

In June, however, Hexo management indicated that it would be short-sighted to enforce the contract for near-term gains.

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“Whether or not this is the right move is debatable, but without the contract, Hexo is relatively undifferentiated versus peers, in our view,” said the note. “Today’s announcement of job cuts indicates to us that the company has not been able to capture meaningful share outside its home province, and we do not believe investors will wait until Quebec’s lack of retail footprint has been addressed.”

The company’s announcement of a C$70 million convertible debt offering on Thursday that caused it to postpone earnings was “curiously timed,” and acts as another question mark, the analysts wrote.

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Hexo will shut down several facilities near Niagara Falls, Ontario, as a result of the layoffs, according to people familiar with the matter. Those facilities were once operated by Newstrike Brands, which Hexo acquired in the spring. Hexo had 822 employees as of April 30, according to its last quarterly filing, and added about 250 more when its Newstrike acquisition closed in May.

For more, read: Cannabis producer Hexo shutting down facilities amid deep staff cuts

The news is just the latest in a long line of problems at the company, including a revenue warning issued in early October and the resignation of its chief financial officer. The company is struggling as the rollout of legal cannabis in Canada has been stymied by a dearth of retail stores, due to regulatory obstacles and the slow pace of license approvals. Wall Street analysts have also tamped down expectations for the past several weeks, issuing a wave of price target reductions.

See now: One year on, Canada’s legal cannabis market is down but not out

Elsewhere in the sector, CannTrust shares CTST, -4.50% TRST, -4.89%  were down 2.6%, after the troubled company said it plans to lay off 140 people by the end of the year. CannTrust, which has been hurt by a scandal involving illegal growing at some of its facilities, also said that the special committee charged with looking into that activity, among other things, has concluded and the committee has presented the findings to the board.

CannTrust said it has submitted the results to Health Canada. The Vaughn, Ontario-based weed company said it expected to release a series of restated financial statements within 60 days, but warned that “intervening events” may affect the timing.

Canopy Growth CGC, +2.26% WEED, +1.98%  was up 1.4%, Tilray TLRY, -2.78%  was down 2%, Cronos CRON, -1.48% CRON, -1.27%  was down 2.1% and Aurora ACB, +1.66% ACB, +1.86%  was up 1.3%.

Vape maker Greenlane Holdings GNLN, -6.09%  was down 7.9%, as the vaping-related lung disease continues to sicken Americans. The Centers for Disease Control and Prevention’s latest numbers show that 1,604 cases of the illness have been diagnosed and 34 deaths have been confirmed.

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Aphria stock APHA, +7.00% APHA, +7.15%  was up 5.5%, Aleafia ALEAF, +0.62% ALEF, +0.00%  was up 0.7% and Organigram OGI, +5.64%  was up 2.55.

The ETFMG Alternative Harvest ETF MJ, +0.59%  was last up 0.7%, but decliners were outpacing gainers among its constituent stocks by 24 to 14. The Horizons Marijuana Life Sciences ETF HMMJ, +1.64%  was up 1%, with 26 of its 86 components lower.

The S&P 500 SPX, +0.42%  was up 0.4% and the Dow Jones Industrial Average DJIA, +0.65%  was up 0.7%.

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