An In-Depth Reading for HEXO (TSX:HEXO) Stock Indicates a Strong Sell Signal

I put HEXO Corp. (TSX:HEXO) through a stock screening tool and got a sell signal. Have a look at the details for yourself.

| More on:

Watching pot stocks fizzle last week was both unsurprising and disappointing. While I have been bearish on the green stuff since the get go, seeing so many excited investors watch the polish come off their shining growth stocks on the day of legalization was a little disheartening.

One of the things that has made the beginning of the industry’s boom turn to bust so saddening has been the misselling of these stocks to hopeful investors who could not – and do not – grasp the complexities behind legalization, nor the difficulties faced in rolling out legal marijuana as a product.

I’m not going to go back over these issues, though I mention them here; suffice is to say, the bust is happening. Let’s take a popular pot stock to illustrate what this looks like in terms of data.

HEXO (TSX:HEXO)

With a market cap of $1 billion, HEXO looks like a proper stock. It has a ticker, it trades on the TSX, it has a share price that rises and falls. Other pieces of data confirm that this is, indeed, a stock that can be invested in: bought, cherished, or sold. But if you run it through a stock screening tool, such as the one below – which has been tested successfully on different types of stocks to ascertain buy or hold signals – it doesn’t come out the other end in one piece.

I use a three factor system, the first factor of which is value. A negative P/E combines unfavourably with a P/B of 4.1 times book, (which, while high for the TSX index, actually signifies good value for the Canadian pharmaceuticals industry). HEXO pays no dividends as yet, leaving it with a value scoring of 4 /33.

HEXO is poor value, low quality, and highly volatile

A negative past-year ROE and disappointing EPS make for a mixed quality reading – the second factor – when combined with a massive 143.1% expected annual growth in earnings, (which will be great for shareholders should it actually materialize, but it’s unlikely).

The latter ought to even out this portion of our in-depth reading, though post-legalization profitability doubts cast a palpable shadow here; overall, HEXO gets 8/33 for quality.

HEXO is showing very high downward momentum at the moment, the third factor in my screening system, which should come as no surprise to those who were bearish on the so-called pot-com boom. To put a figure on it, HEXO shed 20.97% in the last five days. Its beta of 2.65 indicates high volatility, but that’s going to fall as investors start to lose interest in the fizzled green gold rush.

Further, its share price is overvalued by 5.5 times its future cash flow value. This gives a momentum score of 20/33, and a total of 32%, indicating a strong sell signal.

The bottom line

A negative PEG ratio isn’t much of a surprise, after everything, but next time you see one, look for verifiable growth. If you want to keep this stock, weigh the following: HEXO is a debt-free company, which adds to the overall quality of this stock, though it has seen more inside selling than inside buying over the last 12 months. Personally, I think this stock is worth selling – the sooner the better.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.

More on Stocks for Beginners

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

Asset Management
Stocks for Beginners

TFSA: 4 Canadian Stocks to Buy and Hold Forever

Thinking about what to buy with the new TFSA contribution space in 2025? These four Canadian stocks are worth holding…

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »