The market is jittery now, but there’s one important lesson from all of this that you can’t overlook…
Hexo said that it would not meet expectations for the current quarter, and it withdrew any guidance for 2020. Analysts rely on guidance from the companies they cover to make estimates of the company’s prospects.
Hexo withdrew the guidance because of uncertainty in Canada. It gave several reasons, including the much-publicized slow pace of dispensary openings, but many of the reasons appear to be related to the company’s strategy; it was not growing the strains of cannabis Canadians want, and it had some operational difficulties.
For The Green Organic Dutchman, it announced that it was encountering financing difficulties.
Its much delayed massive growhouse in Ancaster, Ontario and another facility in Quebec still need money to be completed, and the Green Organic Dutchman said that market conditions made it difficult to find the financing on acceptable terms.
Both stocks cratered over 24% on the news.
But something else just happened that I want to talk about now.
It’s another lesson the market is trying to teach us that I need to make sure you understand…
Addressing Market Jitters
Frankly, the market reaction to both Hexo and The Green Organic Dutchman was overdone.
Hexo still makes a fine product, which is very popular in dispensaries in Canada. The Green Organic Dutchman also makes a very popular product, and its financing problems are less serious than the market read from the official announcement. In fact, in an interview after its press release, The Green Organic Dutchman CEO, Brian Athaide, said that the company has a sale-leaseback offer for $92 million for that Ancaster facility I talked about earlier. The only issue is that the lenders want to see the facility operating before extending the money, but it’s a good sign that there is an offer.
And perhaps most importantly, Brian said that he does not plan to use equity to fund the expansion – the company simply may have to pay a higher interest rate than it originally disclosed to investors.
Hexo’s situation is a little less clear in the short run, but in the long run, things still look bright. It appears that Hexo simply wasn’t growing the strains that many recreational users wanted. That is a problem which can be solved but of course it takes time to acquire and grow new strains.
I wouldn’t be surprised to see The Green Organic Dutchman appear in the Cannabis Investors’ Report model portfolio when the market stabilizes, and Hexo may make a return, too, when its outlook becomes more clear.
But before I get to the important lesson for cannabis investors, I want to show one more example of the overall market focusing too heavily on the two companies I talked about above.
Good News from Tilray
The market tone has been so bad that most of the cannabis investing world hardly noticed the good news from Tilray Inc. (Nasdaq: TLRY).
Tilray and Anheuser-Busch InBev (NYSE: BUD) announced that their joint venture would be selling CBD drinks in Canada almost as soon as they are legal in December. They delayed the launch of THC drinks because they want to make sure the product is exactly right.
What does that mean?
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THC and CBD tend to degrade when in a liquid environment – they lose their potency. It’s a challenge to make a drink that preserves the cannabinoids from the time the drink is bottled until a customer drinks it.
There are several ways to protect the cannabinoids, but CBD is easier to protect. So the Tilray/InBev joint venture, called Fluent Beverage Company, will launch the CBD products now and wait on the THC.
That’s good news because it means that the joint venture expects the THC beverage to be a very strong product. It’s easier to protect THC for the short time required for a small regional producer to ship directly to dispensaries than it is for the longer term required for a huge beverage company with warehouses and big inventory needs.
It’s also good news because it means that ABInbev is interested in CBD drinks. Many people thought that an alcohol company would be interested in THC drinks, leaving CBD to companies like Coke and Pepsi. Success in the Canadian market could also move ABInbev to seek out joint ventures in the United States for CBD beverages once the FDA provides clarity on that issue.
Finally, the announcement means that all that money companies are spending on research and development is money well spent. Companies like Canopy Growth Corp. (NYSE: CGC) have been spending millions on solving the problem of cannabinoid degradation.
That work will pay off with better products as solutions arise.
But as I said earlier, there was another development happening, and I want to make sure you know about it.
Good News from Aphria
Aphria Inc. (NYSE: APHA) just reported its earnings, and achieved an important feat.
Aphria earned C$16.4 million on revenue of C$126.1 million in the quartered ended August 31, and it has become one of the biggest cannabis producers to post a second-consecutive profitable quarter.
Early in the morning yesterday, the stock price was up over 20%.
Even Hexo, with all the worry, was up over 11%.
And that leads me to the important lesson.
The Important Lesson
If you look at things a little more closely, you’ll see that the most recent decline in cannabis stock prices is the mark of a jittery sector.
Both of the problems I listed earlier are specific problems at Hexo and The Green Organic Dutchman, and this reminds me of earlier this summer when CannTrust Holdings (NYSE: CTST) turned out not to be worthy of our trust.
The Supreme Cannabis Co. (OTC: SPRWF) doesn’t seem to have any problems selling cannabis and OrganiGram Holdings Inc. (Nasdaq: OGI) is building out its facilities on schedule, but the market is now treating every cannabis company like it has those problems.
Once the market recovers, it will do a better job distinguishing between successful companies and those facing challenges. As I review our investment thesis for each and every company, I place an emphasis on only having the companies that are going to survive these rocky times.
But as we’ve seen with Aphria, its good news is helping to propel the cannabis industry forward.
What this means is that the market is finally starting to see good news as clearly as it had been seeing bad news over the summer. That could be very good news for investors, too, as more and more companies report strong sales growth and progress toward positive earnings.
This is a testing time, but hang in there.
It will be worth it.
Executive Director, National Institute for Cannabis Investors
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4 responses to “Hexo and The Green Organic Dutchman: What to Learn From Recent News”
October 16 2019