Hexo stocks dive after downgrade, dragging the cannabis sector lower

Hexo Corp. shares took another bath Monday, after Seaport Global downgraded the stock along with market leader Canopy Growth, in a note advising investors to exchange Canadian cannabis shares and to US multistate operators.

Hexo share

HEXO, -5.93%

HEXO, -10.90%

dropped 5.5% in light volume on the Columbus Day holidays, bringing the losses in one month to another 44%. The stock fell sharply last week after the company issued a fiscal fourth quarter earnings report and pulled its fiscal 2020 outlook. The news served as a reminder that the Canadian sector is yet to make a profit thanks to a continued strong black market and the slow rollout of stores, leaving stocks lower across the board.

Seaport downgraded Hexo and Canopy Growth

CGC, -2.88%

WEED, -5.49%

to neutral from purchasing and maintaining Aurora Cannabis

ACB, -3.56%

ACB, -2.02%

and Tilray

TLRY, + 0.35%

as neutral, leaving Aphria Inc.

APHA, -4.99%

APHA, + 0.32%

as the only purchase-rated stock among Canadian cannabis stocks in coverage. Analysts Brett M. Hundley and Luke Perda said they have set their model, ranking and price target for Green Organic Dutchman

TGODF, -2.11%

TGOD, + 7.21%

on evaluation, pending news of work on obtaining new funding.

"As for the US multistate operator group, we see a completely different set of circumstances in place, and we would strongly recommend that investors rotate away from Canada and toward the United States," the analysts wrote in a note to clients. "We do not think that recent vape headlines will significantly cut MSO economics, and we see a number of opportunities for public MSOs on the horizon."

See: & # 39; Don't smoke Kool -Help, says analyst in sober note on the cannabis sector

The analysts said they were disappointed with Hexo's development of its hub-and-talk model "and we wonder if the latter is even possible for marijuana, specifically, anything more. “They were further disappointed by the departure of CFO Michael Monahan, who quit on October 4 to seek a better work-life balance.

In Canopy's case, analysts said they no longer expect the company to receive incremental equity funding from Constellation Brands

STZ, -0.30% ,

the Corona beer brewer, Canopy's largest single shareholder after a $ 4 billion investment last year.

"This added cash assumption had been at the core of our purchase valuation during our valuation analysis," it wrote.

Canopy stock was down 3.2%.

Aurora Cannabis shares fell 2.3% as Seaport adjusted projections and MKM lowered its stock price target to C $ C $ 3.50 ($ 2.65) from $ 5.00.

"The company has said it is tracking Ebitda's profitability, but we expect the landscape to be much tougher going forward," wrote the Seaport analysts. ACB is in the process of handing out a costly asset base in Canada and Denmark to markets that are expected to Now more than ever, we believe that Canadian LPs need to maintain a low cost structure while maintaining adequate capital / cash reserves. "

MKM analyst Bill Kirk repeated his sell rating on the stock, citing softer cannabis prices , a growing gap between the price of legal pot and black market product and fewer than expected new store openings in Quebec and Ontario.

“In its September 12 earnings call, Aurora warned that July and August had slowed, including Hexo Corp's comment and pace of new stores, we have no evidence that September and early October were better, "Kirk wrote in a note to customers.

See also: Cannabis shares constitute early gains as gains continue for 24 hours after major provisions

The analyst lowered his fiscal 2020 first-quarter tax estimate to $ 98 million from a previous $ 117 million, below the $ 105 million consensus. "We believe the profitability of cultivators in general will deteriorate before it gets better," he wrote. "Prices are already falling and availability in supply will continue to grow / improve."

Now see: Mitch McConnell meets with executors in California and needs cannabis banking reform

In other news about the sector, the two Ukrainian businessmen tied to President Donald Trump's personal lawyer, Former New York mayor Rudi Giuliani, who was arrested last week and charged with violating federal campaigns, has also been indicted in a US cannabis corruption scheme, according to news site Leafly.

The couple, Lev Parnas and Igor Fruman along with another Soviet-born US citizen Andrey Kukushkin, were indicted for working on behalf of a foreigner to try to select two candidates in Nevada to gain the benefit of obtaining recreational licenses.

Afria was down 8%, Aleafia

ALEAF, -2.21%

ALEF, -1.25%

was down 0.6%,

OGI, -0.63%

down 6% and KushCo

KSHB, -4.86%

was down by 3.5%.

ETFMG Alternative Harvest ETF

MJ, -0.80%

was down 2%, while Horizons Marijuana Life Sciences ETF

HMMJ, -1.33%

had not yet traded.

S&P 500

SPX, -0.14%

and Dow Jones Industrial Average

DJIA, -0.06%

was flat.

Cannabis Watch: Read the full MarketWatch coverage of cannabis businesses