When the year started, Hexo (NYSEAMERICAN:HEXO) stock got off to a nice start. The shares went from $5 to $8 — riding the cannabis bull wave spurred by the legalization in Canada. But unfortunately, the expectations were too exuberant. Since late April, the HEXO stock price has gone into reverse; right back to $5.
But the company is not alone. Various other cannabis stocks have also been in the downtrend, such as Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB) and Cronos Group (NASDAQ:CRON). For the most part, all have had challenges in scaling up for the enormous demand in the industry.
Now in the case of Hexo Corp stock, the latest earnings report was particularly disappointing. The company reported revenues of 13.02 million CAD, compared to the Street estimate of 14.8 million CAD. In fact, there was a quarter-over-quarter drop of nearly 9%. There was also weakness in the average price of adult-use dried grams as well as the average gross selling price per gram.
Yet the choppiness should not be a surprise. The cannabis is still in the early stages and there will be growing pains.
But despite all this, I still think HEXO stock represents an interesting opportunity. And to see why let’s take a look at the following catalysts:
HEXO Stock: Scale
While at an investor conference, Tilray (NASDAQ:TLRY) CEO Brendan Kennedy and CFO Mark Castaneda provided some interesting insights about the cannabis opportunity. One of their main contentions was that there will ultimately be a handful of major winners in the market. After all, a company will need a global platform to realize economies of scale so as to provide competitive pricing.
Granted, as for HEXO, the company has struggled to ramp up production. Yet this should prove temporary. The company already is the dominant player in the Quebec market (which is the second largest in Canada). What’s more, HEXO has began construction of a 323,000 square-foot facility in Greece. The acquisition of Newstrike Brands should also be a boost.
Keep in mind that Hexo’s management has reiterated its aggressive growth for revenues. For fiscal 2020, the forecast is for 400 million CAD.
HEXO Stock: Strategic Partnership
HEXO has entered a 50-50 strategic relationship with Molson Coors (NYSE:TAP). Both parties will develop drinks that are infused with cannabis. Consider that the goal is to begin selling in Canada on Dec. 17.
Gauging the potential impact of this is tough. But having the expertise, marketing capacity and distribution of TAP will be significant.
But this is likely to just be one of the major deals for HEXO. During the latest earnings conference call, CEO Sebastien St.-Louis noted that he is talking to over 60 potential partners – and that there should be another deal announced by the end of the year.
HEXO Stock: Liquidity and Valuation
HEXO stock will soon be listed on the venerable New York Stock Exchange. This will put the company in a rare group, with only two other cannabis operators (CGS and ACB). The new listing will provide more visibility for the company – helping to snag partnerships and deals. But it will also mean more liquidity for the shares.
Oh, and the valuation on HEXO stock is at fairly reasonable levels, at least compared to its other large rivals. For example, Bank of America (NYSE:BAC) analyst Christopher Carey believes it is the most attractive within his coverage universe – and he has a juicy $10 price target on the stock.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.