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Why HEXO Dived on Friday While Other Marijuana Stocks Soared

The Motley Fool logo The Motley Fool 12/4/2020 Eric Volkman
a close up of some bushes: Why HEXO Dived on Friday While Other Marijuana Stocks Soared © Provided by The Motley Fool Why HEXO Dived on Friday While Other Marijuana Stocks Soared

What happened

Friday was a happily memorable day for the marijuana sector, but you wouldn't know that from the performance of HEXO (NYSE: HEXO) stock. The company's shares cratered by nearly 8% on the day, despite the passage of a historic marijuana decriminalization measure in the U.S. House of Representatives.

But investors had good reason to be bearish on HEXO despite that encouraging development.

a group of bushes and green grass: Wilted marijuana plants. © Getty Images Wilted marijuana plants.

So what

In what can't be classified as an instance of ideal timing, as the House was preparing its vote, HEXO announced that it has scheduled an annual general meeting (AGM) of shareholders for Friday, Dec. 11.

There's nothing unusual about calling an AGM, but a peek at the meeting's agenda reveals one troubling item -- a vote on a reverse stock split of the company, at the rate of eight common shares for one.

That isn't unexpected, as HEXO had proposed this "share consolidation" concurrent with its Q4 of fiscal 2020 results published in October. It's also not an unusual move in the cannabis industry; in May, HEXO's peer Aurora Cannabis enacted a 1-for-12 reverse stock split.

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Now what

The thing is, no matter how anticipated, stock splits are very disheartening events. They are rare pieces of basic financial engineering that are almost always done to avoid a stock's delisting, as they boost its per-share without adding any true value to it. HEXO's not doing too badly for a pot company these days, but this move sure isn't going to improve sentiment on its stock.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.


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