HEXO Corp. (NYSE:HEXO), the Canadian cannabis company, is in a tailspin. HEXO stock price is down about 20% this month, more than triple the June decline of the ETFMG Alternative Harvest ETF (NYSEARCA:MJ). The June swoon has HEXO stock price about 35% below its 52-week high, more than enough to officially put the marijuana stock in a bear market.
Hexo stock price closed at $5.36 yesterday, giving it the look of a security that is either a value play or a value trap. Either way, one share of Hexo stock is now cheaper than “splurging” on yourself and eating lunch out today.
Stocks with low price tags, the condition Hexo stock is currently afflicted with, have a way of luring investors. Many of these names become “cheap stocks” simply because they are poorly run or fundamentally flawed companies. Other stocks rapidly decline because of near-term blips and bearish traders getting too far ahead of themselves.
While the Street will always debate why a stock gets drubbed in a short amount of time, such as HEXO losing about 20% this month, the key is figuring out if it is a bad stock that’s receiving justifiably harsh treatment or a quality name with rebound potential. A case can be made that HEXO is in the latter category.
HEXO’s Recent Woes
HEXO does not garner the same level of attention as some of the larger marijuana stocks, such as Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY), or Cronos Group (NASDAQ:CRON). Still, Hexo is the dominant cannabis name in Quebec, Canada’s second-largest province. The company controls 30% of Quebec’s marijuana market.
Hexo stock is being taken to task largely because it announced earlier this month that its quarterly revenue had missed analysts’ average estimate. Since HEXO has a market value of just $1 billion, investors view it as a growth name. With high growth expectations come some tolerance for lack of profitability. However, the tradeoff is expectations of high revenue growth.
Fortunately, analysts are projecting significant revenue growth for HEXO. The company is expected to post revenue of C$62.62 million in 2019, a figure that could run to C$320 million in 2020. However, Hexo stock currently does not reflect the potential for the company’s revenue to more than quadruple next year.
The recent price action of Hexo stock reflects a great deal of risk, some of which is justified. Recently, Jefferies analyst Owen Bennett, who has an “underperform” rating on Hexo stock, pared his price target on the name and highlighted several risks that could surprise the owners of Hexo stock.
Those risks include Canadian authorities potentially delaying guidance on non-flower cannabis derivatives, the possibility that the launch of a processing facility HEXO is building could be delayed, and margin compression due to a supply glut in the Canadian marijuana market.
The Bottom Line on HEXO Stock
There is no such thing as a risk-free bet in equity markets, and that is particularly true of marijuana stocks. However, Hexo stock has arguably priced in plenty of bad news without accounting for its longer-term bullish catalysts, including geographic diversity.
“The Canadian Company is one of the largest licensed cannabis companies in Canada, operates with 1.8 million sq. ft of facilities in Ontario and Quebec and has a foothold in Greece to establish a Eurozone processing, production and distribution centre,” according to the company.
Additionally, HEXO is taking steps to enter the fast-growing U.S. CBD market, and it is partnering with Molson Coors (NYSE:TAP) on cannabis beverages. Investors who grab Hexo stock right now may not have the smoothest of rides, but if its revenue growth over the next 12 months meets or beats expectations, Hexo stock can climb meaningfully.
As of this writing, Todd Shriber does not own any of the aforementioned securities.
