A revenue warning from Hexo Corp. and concerns about a lack of profits in the marijuana sector sparked a massive re-rating of risk by analysts last week with investors making moves to price in heightened risk which caused the sector to experience double-digits losses by week's end. Here is a review of what happened and why. 

What happened

It seems one sentence from HEXO’s (TSX:HEXO; NYSE:HEXO) press release is taking the brunt of the blame for the market collapse surprising the market when it announced disappointing preliminary fiscal 2019 fourth-quarter revenue and withdrew its outlook for full-year fiscal 2020 citing:

1. “Slower than expected store roll-outs,
2. a delay in government approval for cannabis derivative products
3. and early signs of pricing pressure are being felt nationally and lower than expected product sell through.”

The above statement comes on the heels of the company announcing on October 4th - just ahead of fiscal Q4 financials - that its recently hired CFO was leaving the company to spend more time with his family. Jefferies cut Hexo's stock price target to C$3.80 from C$7.70. The market reaction was to drop the stock's price by 38.2% in just the last week alone.

All these factors directly impact the major Canadian cannabis producers as they are counting on the Cannabis 2.0 market (the legalization and introduction of edibles in the Canadian marketplace later this year) providing a nice boost to sales and any big obstacles for this market could derail those hopes.

Below are further developments that contributed to the sell-off of many of the major marijuana producers last week:

1. Canopy Growth Inc. (TSX:WEED; NYSE:CGC) had its target price lowered by a number of analysts last week which has also contributed to the -15.9% decline in its stock price last week.

• Piper Jaffray from $49 to $40
• Compass Point from $32 to $24
• CIBC from C$50 to C$45
• Jefferies from C$77 to C$25.

2. Aurora Cannabis Inc. (TSX:ACB; NYSE:ACB) had its target price reduced by MKM Partners analyst Bill Kirk who cut his stock price target to C$3.50 (US$2.65) from C$5.00 based on the same reasons HEXO stated in their above mentioned press release while Jefferies lowered ACB's price target to C$7 from C$14. By the end of last week its stock had declined 16.8% in price.

3. Cronos Group Inc. (TSX:CRON; Nasdaq:CRON) analysts tracking the stock had been collectively modeling nearly C$143 million in sales for the company in its next fiscal year but by last week that estimate had been whittled down to C$110 million with the investment bank, Jefferies, knocking its price target down to C$10 Canadian (US$7.55) per share from the previous C$15 (US$11.33). Its stock declined 13.6% last week as a result.

4. Green Organic Dutchman Holdings Inc. (TSX:TGOD) revealed that it has been unable to access debt capital and may have to defer completing the build-out of its Quebec facility and is reviewing its financing options. Its stock dropped 39.6% last week as a result.  

 5. MedMen Enterprises Inc. (CSE:MMEN; OTC:MMNFF) disclosed a week ago Monday that it has replaced its recently hired CFO with someone from its finance team just weeks ahead of its Q4 financial reporting and has terminated its C$682M deal to buy PharmaCann LLC that it had announced a year ago. Investors dumped the stock as a result and its price declined by 28.2% by the end of last week.

6. Harvest Health and Recreation (CSE:HARV; OTCQX:HRVSF) is struggling to access capital. Its debt financing with Torian Capital, which it announced at the end of July, has yet to close despite the company's expectation that the first tranche of the C$225 million deal would close by the end of August. Its stock declined 15.0% last week.

7. Village Farms (Nasdaq:VFF) A syndicate of underwriters have agreed to purchase, on a bought deal basis, 2.66M common shares in the capital of VFF at $9.40/Offered Share for aggregate gross proceeds of C$25,004,000 with net proceeds to be used for working capital and general corporate purposes. The stock declined 21.7% last week on the news.

8. Aphria Inc. (TSX:APHA; NYSE:APHA) had its wholesale cannabis supply agreement with Aleafia Health Inc. (TSX:ALEF; OTCQC:ALEAF) terminated by Aleafia last week claiming that Aphria had failed to meet its obligations. The company said it was disappointed by the move and that it had every intention of fulfilling the deal but its shares fell 13% last week on the news.

While there is major concern about the sector’s ability to start creating profits we’ll most likely look back at today’s market as a ridiculous buying opportunity for select stocks. The cannabis industry isn’t coming to an end, its simply resetting valuations across the board.