Why HEXO Stock Is Interesting, But Not Compelling

There are lot of marijuana stocks out there. There are the heavy-hitting headliners, including Canopy (NYSE:CGC), Aurora (NYSE:ACB), Tilray (NASDAQ:TLRY), and Cronos (NADSAQ:CRON). Most investors have heard of those Big Four. But then there are the under-the-radar pot stocks, such as Aphria (NASDAQ:APHA) and Akerna (NASDAQ:KERN).

Why HEXO (HEXO) Stock Doesn't Look Like a Good Investment

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One under-the-radar marijuana stock which has just recently shot onto the scene is HEXO (NYSEMKT:HEXO), in the wake of its recent  NYSE listing. Some investors may be tempted to buy HEXO stock because of its novelty. It’s a fresh face in the marijuana stock world. Indeed, there are some things to like about HEXO stock, such as its cheapness relative to other marijuana stocks.

But there’s not enough to like about HEXO stock to make it worth buying. Instead, there’s simply enough to make HEXO stock interesting to watch from the sidelines.

As a result, I think staying away from HEXO stock for the time being is the right move. There are much better marijuana stocks out there.

Why HEXO Is Interesting

There are three main reasons why HEXO stock is interesting.

First, HEXO is in the right market. Given that cannabis consumption is medically better than other forms of drug consumption, cannabis consumption has been on the rise, while alcohol and tobacco consumption have been on the decline.  Meanwhile, around the world, cannabis is progressing towards legalization as negative stigmas about it are being eroded.

Given these trends, the global cannabis market should one day be both fully legal and really huge. That means that over the next decade-plus, the cannabis market (and its most important players) will experience robust revenue and profit growth.

Second, HEXO is clearly a legitimate Canadian cannabis producer. The company has large growing capacity, sold a bunch of cannabis last quarter, and has an experienced management team. Finally, it has a unique deal which positions it as the leader of the Quebec cannabis market for the foreseeable future.

Third, HEXO stock is undervalued relative to its cannabis peers.  Many other marijuana stocks trade well north of five times analysts’ consensus 2020  sales estimates. For example, Canopy Growth and Aurora both trade at over ten times analysts’ average 2020 sales estimates for them. HEXO stock, however, trades at just 4.6 times the consensus 2020 sales estimate, a sizable discount to most of its peers.

Broadly, then, the combination of being in the right market, checking off all the right boxes, and being relatively undervalued makes HEXO stock an interesting option here and now.

Why HEXO Isn’t Compelling

Despite being an interesting option in the cannabis space, HEXO stock isn’t a compelling option, and that’s mostly because, in all likelihood, this company won’t meet its goals.

Canada is the world’s largest fully legal cannabis market. As the world’s largest completely legal cannabis market, Canada is home to multiple cannabis producers. There are the headliners – Canopy, Aurora, Cronos, and Tilray – and the others. HEXO falls in “the others” category.  All Canadian cannabis companies think that they will strike gold in the Canadian cannabis market, become a leader there, and then extend that leadership onto the global stage.

But they can’t all become major players in the global cannabis market.  Think about the Dot Com Bubble in 2000. Everyone was right then that the internet was going to be the next big thing. But not every internet company grew alongside the internet. Instead, the internet market consolidated around a few titans like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG), while many of the other super-hyped Dot Com stocks went bust.

The cannabis market will play out in a very similar fashion. Cannabis is the future. But, in that future, only a handful of today’s cannabis companies will become major players. The rest will go bust.

The problem with HEXO stock is that, right now, HEXO does not look poised to  become one of the major players when the cannabis market peaks. HEXO has a small customer base relative to the market leaders. It also doesn’t have the same growing capacity as the market leaders. Nor does it have the huge partnerships that Canopy and Cronos do, and it hasn’t made much progress in the all-important U.S. market.

All in all, given the low likelihood of the company becoming a global cannabis player, HEXO stock isn’t all that compelling at its current levels.

The Bottom Line on HEXO Stock

As a relatively undervalued pot stock whose long-term growth outlook is uncertain, HEXO stock is interesting to watch, but not compelling to buy. For investors looking to play the cannabis boom, I continue to recommend the market leaders, Canopy and Aurora.

As of this writing, Luke Lango was long CGC, ACB, AMZN, and GOOG.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/why-hexo-stock-is-interesting-but-not-compelling/.

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