Despite the many bullish notes from analysts on Hexo (NYSE:HEXO), the HEXO stock price continues to fall. Many think the company could soon be regarded by industry analysts as a top-tier marijuana stock.
However, HEXO stock has tumbled since April, and its U.S. equity now trades at record lows. Hexo Corp stock looks to have a bright future, but investors may want to wait before buying HEXO .
Of the smaller, under-the-radar marijuana companies based in Canada, this has become one of my favorites. Its strength in its home province of Quebec gives it a strong base.
Moreover, its alliance with Molson Coors (NYSE:TAP) should be valuable and provide a positive catalyst as cannabis-based beverages become legal in Canada and hit the market later this year.
Nonetheless, since Hexo peaked at $8.40 per share on April 29, the stock has continuously declined. The current price of around $4.25 per share makes HEXO stock a penny stock and puts it within striking distance of its 52-week low. More prominent marijuana stocks such as Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) have also fallen.
Hexo likely unnerved the owners of HEXO stock by reporting that its revenue fell in Q2 versus Q1. Still, the drop has seemed like an overreaction. Investors seemed to ignore that the company’s revenue increased by 1,250% year-over-year in Q2.
For the current fiscal year, analysts, on average, forecast a revenue increase of over 1,000%. They predict that the company’s growth will fall to a mere 452% in fiscal 2020. Many investors will probably see the recent quarter-over-quarter decline as an anomaly rather than a trend.
Hexo’s Credibility Is Surging
As another InvestorPlace columnist, Josh Enomoto, stated, Hexo gained a “massive credibility boost” by switching from the NYSE American stock exchange to the New York Stock Exchange. There, it joins Canopy Growth and Aurora Cannabis. HEXO’s association with those companies should boost its image.
Furthermore, another InvestorPlace writer, Tom Taulli, believes the company can survive the intense competition in the cannabis sector by boosting its production. He thinks that HEXO’s acquisition of Newstrike Brands, along with an upcoming 323,000 sq. ft. facility in Greece, should boost its output.
Don’t Buy HEXO Yet
That said, it could be difficult for investors to know when to buy a tumbling equity like HEXO. Currently, it trades at a forward price-earnings (PE) ratio of 51.5. For a cannabis company, that appears to be a reasonable valuation, since the price-sales ratios of some marijuana stocks are in the triple digits.
However, HEXO’s forward price-earnings ratio is well ahead of the average S&P 500 forward PE ratio. Even the hottest stocks only stay at stratospheric multiples for awhile. One has to wonder if the sector’s elevated multiples will eventually sink. If the multiples of the sector’s largest equities drop, HEXO could continue its swoon.
The Bottom Line on HEXO Stock
Investors should hold off on buying HEXO stock until the equity finds a price floor or a catalyst. HEXO has taken steps to expand its production and enter new markets. It will work closely with Molson Coors to develop cannabis-based beverages. Given these attributes, Hexo Corp stock could enter the top tier of Canadian marijuana stocks.
However, the valuations of the cannabis sector have begun to fall below their previous stratospheric levels. Hexo’s multiple has remained comparatively modest, but its valuation remains well above the S&P 500 average. Moreover, HEXO is not trading near an established price floor.
HEXO looks poised to become one of the more prestigious marijuana stocks. Still, until the price stops falling, traders should avoid buying HEXO.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.