Can These Once-Hot Pot Stocks Recover?

Is there hope for these three companies that once rocked the Canadian marijuana industry?  When Canada legalized recreational marijuana in 2018, three stocks came to dominate the market…

Aurora Cannabis (NYSE:ACB)HEXO (NYSE:HEXO), and Canopy Growth (NYSE:CGC). All three had already established their names in the medical cannabis space, so recreational pot legalization just gave them more scope.

However, external headwinds and a few internal mistakes led to huge losses for these companies last year. “Cannabis 2.0,” the second wave of recreational cannabis legalization in October 2019 (including vapes, edibles, beverages, concentrates, and more), sparked some hope — but issues remained as product launches took time and the coronavirus pandemic hit.

The situation is tough for these companies, but they seem to be making efforts to recover. Is there any hope for these pot stocks in 2020?

Aurora Cannabis is going all-in this year

Stock dilution is usually not seen as a good sign, because it reduces the value of an investment. But Aurora Cannabis had no other option but to execute a reverse stock split in May to save itself from being delisted from the New York Stock Exchange (NYSE) when its shares fell below $1, the NYSE standard trading price. Unlike its peers, Aurora hasn’t been able to bag a partnership deal with a strong consumer company; instead, it has been adopting various cost-cutting strategies to save cash.

It has shut down five of its smaller facilities and merged a few of them in Canada, while ramping up operations in its Nordic facility in Europe. The company expects these moves to reduce its operating expenses enough to achieve positive EBITDA (earnings before interest, taxes, depreciation, and amortization) by the first quarter of fiscal 2021, ending in September. 

As I discussed earlier, Aurora’s chances of recovery will depend on key markets like the U.S., where growth is evident. We will know more about how Aurora’s strategies are working out when it releases its fourth-quarter results, expected on Sept. 25.

Hexo needs to be careful

An NYSE listing warning in April after its stock, too, fell below $1 put HEXO in a spot. It, too, had no option but to use stock dilution to raise capital. It also sold its Niagara, Ontario, facility, for $10.2 million Canadian dollars. The intention was to focus on profitable operations, including an expansion of its Belleville, Ontario, location.

The company had CA$95.3 million in cash, cash equivalents, and short-term investments at the end of the third quarter. It also managed some additional financing of CA$50 million. 

Its net revenue (minus excise taxes) grew 70% year over year to CA$22.1 million. But EBITDA losses came in at CA$4.3 million in Q3. The good news is, that’s an improvement from losses of CA$8.5 million in Q3 2019. Hexo hopes to achieve positive EBITDA by the first half of fiscal 2021, which will depend on the impact of the pandemic on the company’s operations, store rollouts, and customer demand. 

Its performance seems to be on track for now. HEXO has made its way into a new market via its partnership with Israeli medical cannabis producer Breath of Life International, and into the U.S CBD (cannabidiol) market through its partnership with Molson Coors Beverage Company. 

My only worry is that HEXO has been leaning way too much toward…

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