The marijuana market has created an appealing opportunity for risk-tolerant investors who are willing to wait out the near-term turbulence. However, while deciding to invest in the cannabis boom might seem like a no-brainer, choosing a winner in the space takes a bit more analysis. Recently, Canadian marijuana firm Hexo Corp (NYSE:HEXO) has gained a lot of attention and made many traders’ short list.
Here’s a look at the case for and against Hexo stock.
Pro: Hexo Stock Is Seeing Market Share Growth
Right now, Hexo controls roughly 30% of Quebec’s marijuana market. That figure is likely to remain constant or rise over the next few years as the firm currently has a multi-year supply agreement that will keep its position relatively stable. As Canada’s recreational pot market grows and regulations ease, Quebec will likely represent about 20% of the nation’s overall marijuana market, giving Hexo a huge growth runway. With those figures in mind, Hexo stock could eventually capture between 7%-10% of Canada’s overall marijuana market.
On top of that, Hexo has the potential to grow outside of Canada as well. The firm partnered with Molson Coors Brewing (NYSE:TAP), which looks likely to provide a large international growth runway as the marijuana market around the world develops. Plus, Hexo CEO Sebastien St-Louis has been open about his plans to partner with big names across a variety of industries in order to drive growth for HEXO stock in the years ahead.
Pro: Analyst Recommendations
Of the 14 analysts who cover Hexo stock, 10 recommend buying the stock, three say to hold and only one says it’s time to sell. Bank of America Merrill Lynch analyst Christopher Cary said that although he is expecting the Canadian cannabis market to struggle this year and next, HEXO is still likely to outperform the market.
Plus, HEXO is a common purchase among cannabis fund managers further suggesting that the company is a market-beating bet.
Pro: It’s on Sale
Another reason investors might be interested in considering the Canadian marijuana company is then fact that Hexo’s stock price is trading more than 50% lower than its April highs. Hexo stock only recently gained notoriety as one of the top-tier marijuana investments when the firm left the NYSE American exchange and joined the New York Stock Exchange, putting it on the same playing field as other marijuana heavyweights like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB).
The industry as a whole has lost some of its momentum, and HEXO has found itself burdened by some controversy that further depressed its share price. However, if you’re willing to wait out near-term volatility, HEXO looks relatively cheap making now a good time to take a position.
Con: Still Expensive
Despite the weakness that the marijuana sector has experienced recently, it’s important to note that cannabis stocks are still expensive when you compare them to the rest of the market. According to Charles Schwab, Hexo shares trade at 44 times the company’s sales, a sky-high multiple when you compare it to the healthcare sector’s average of 2.21.
Part of the reason for HEXO’s elevated multiples is the fact that the industry has a lot of potential growth on the horizon, but that doesn’t take away the risk that investors are taking on by buying in an already-hyped-up industry. As the old adage goes, what goes up must come down, and eventually the marijuana industry’s multiples will have to come back down to earth.
Con: Management Uncertainty
Any time upper management walks away from a company, investors are going to question their reasoning. That’s even more the case with a young company on the rise like Hexo. In July, co-founder Adam Miron announced his departure from his role as chief branding officer.
Miron said he will remain a part of the company as a board member and that he was ready to move on now that the firm has become “and established company.” Perhaps it means nothing, but Miron’s decision to walk away certainly raises a few red flags from an investment standpoint.
Con: Marijuana Market Uncertainty
Any time you’re buying into a young industry you have to take into account the uncertainty that comes with it. The marijuana industry is a young one with a lot of regulatory concerns. Navigating such a complicated regulatory environment requires cannabis companies to make decisions based on future policy predictions.
For HEXO we’ve already seen that play out as the firm defended itself against critics who chastised it for advertising its products using social media.
If you’re looking for a marijuana stock to add to your portfolio, Hexo stock isn’t a bad pick. The firm looks likely to benefit from the rising tide in the marijuana industry, and management’s efforts to secure big-name, cross-industry partnerships looks like a good way to create growth avenues in the future. There’s likely to be a great deal of turbulence over the next few years, but those risks appear to be industry wide.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.