As if the marijuana sector couldn’t disappoint me more, companies like Hexo (NYSE:HEXO) seemingly find new ways to frustrate me. I’m not just saying that from a point of theoretical commiseration. Recently, I bought Hexo stock, and in hindsight, that wasn’t the right move.
Still, I’m staying true to my convictions. Consistently, I’ve mentioned that while HEXO and the usual suspects — Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) — represent transformative investments, they’re also incredibly volatile. You should be ready for anything. Therefore, I’m not panicking because of the Hexo stock price.
Nevertheless, I can sympathize with those who are eyeing the sell button. In just a little over two weeks, the Hexo stock price dropped double digits. Fundamentally, the markets took a dim view on a recent executive reshuffling. In July, management disclosed that chief branding officer Adam Miron is stepping away from his role but staying on as one of the board of directors.
It’s an unusual move, and the timing could haven’t been worse. After all, marijuana stocks are struggling to regain control of the narrative after a series of disappointing earnings releases. Thus, it’s no surprise that the Hexo stock price stumbled like it did.
If that wasn’t bad enough, HEXO may have pushed the government watchdog agency Health Canada too far. Apparently, the marijuana firm advertised on Snap’s (NYSE:SNAP) popular Snapchat app using provocative language and imagery. Because Snapchat is heavily associated with impressionable teens, the move may not sit well with Health Canada.
But despite these admittedly detracting troubles, I’m still holding the course with Hexo stock.
Don’t Let the Noise Deter You From Hexo Stock
Generally, it’s important to understand that as of this writing, we don’t have any evidence that HEXO did anything illegal. For instance, bearish reports compare the company with another troubled name in the sector, CannTrust (NYSE:CTST).
But the difference here is that CannTrust got pinged for unlicensed growing. That went against Health Canada’s clear and long-established guidelines. As a result, CannTrust fired CEO Peter Aceto with cause. I don’t know the specifics about Canadian labor laws. But in the U.S., you typically don’t fire someone with cause unless you’re absolutely sure of misconduct.
For what it’s worth, HEXO denies wrongdoing with the Snapchat fiasco, claiming that they follow all social media regulations. In my opinion, it’s a silly thing to do with limited upside. Thus, I’m leaning toward believing their management team, but I’ll wait for Health Canada to render final judgment.
Adding support to HEXO’s case is that with Canadian social media advertisements, the regulations are open to interpretation. For one thing, social media platforms have internal safety features to prevent inappropriate ads reaching minors. As long as HEXO obeyed the rules as they claimed, they can offer a legitimate rebuttal.
Plus, Health Canada’s guidelines on what determines provocative or inappropriate language and imagery is somewhat vague. The guidelines are nowhere near as transparent as cannabis growing procedures. Therefore, comparing Hexo stock with CannTrust is a wild stretch.
On the other point regarding Miron’s exit, I’m not terribly sure how that impacts the Hexo stock price longer term. It could be something related to a critical event, or it could be nothing at all. At this point, it’s just speculation, and I don’t want to do anything brash on non-news.
The Good News Outweighs the Bad
At this juncture, I think it’s appropriate to consider the reasons why you should invest in Hexo stock. First, earlier this year, HEXO acquired Newstrike Brands. This gives the company access to a premium indoor facility that can churn out approximately 150,000 kilograms of high-grade cannabis. The buyout also expands HEXO’s coverage throughout Canada.
Second, HEXO has an ongoing partnership with Molson Coors Brewing (NYSE:TAP) to develop cannabis-infused drinks. According to Forbes, such beverages already represent big business, and it’s only increasing in scope. This partnership helps both parties effectively tap into this growing phenomenon. Cannabis drinks may also act as a gateway to other legal marijuana-based products.
Finally, Hexo stock offers a silver lining to the U.S.-China economic conflict. With the number one and two economies of the world apparently on the verge of a currency war, the U.S. desperately needs whatever alternative revenue sources they can get.
Enter weed. The marijuana industry owns the fastest-growing job market. That’s an impressive feat considering that, at least right now, unemployment is at multi-year lows. If the Trump administration wants to keep that momentum alive — especially before the 2020 elections –he has an easy lever to pull. (Though it’s fairly unlikely he’ll pull it, it is a possibility.)
So don’t give up on Hexo stock yet. It just might surprise you.
As of this writing, Josh Enomoto is long Hexo stock.
