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Why HEXO Stock Still Isn’t a Compelling Investment

About a month ago, I wrote my first piece on newly public Canadian cannabis producer HEXO (NYSE:HEXO). I wrote that HEXO stock is interesting because the company is in the cannabis market, which is a non-cyclical growth sector. But I contended that HEXO stock wasn’t compelling because HEXO had not yet proven that it was a good company.

So I simply recommended that investors monitor HEXO stock but refrain from buying it.

Ever since my initial column was published, HEXO stock price has been exceptionally volatile. First, it dropped from $5 to $4 in just over a week. Then, it showed strong support at $4, and subsequently rebounded to $4.75.

Now I’m doubling down on my initial thesis. There are a lot of marijuana stocks out there. Most of them won’t make it. Probabilities and fundamentals suggest that HEXO will be one of the companies that won’t survive. Until that changes, long-term investors should stay away from HEXO stock.

HEXO Is a Fine Company

At its core, HEXO is a fine company in a really good sector.

For all intents and purposes, HEXO looks just like many other Canadian cannabis companies. HEXO grows, distributes, and sells medical and recreational cannabis, mostly in Canada, although it also exports cannabis to many other countries. The company, which has ample growing capacity, is focused on lowering its production costs and is excited about the upcoming legalization of cannabis vapes and edibles in Canada in late 2019.

HEXO also has a unique partnership with Molson Coors (NYSE:TAP) which focuses on creating cannabis-infused, non-alcoholic beverages.

All in all, HEXO is very similar to Tilray (NASDAQ:TLRY), Cronos (NASDAQ:CRON). Aphria (NYSE:APHA), and most of the other cannabis producers.

But that’s not a bad thing. All of these  companies are competing for the global cannabis crown, which will one day be worth a ton. The global tobacco and alcoholic beverage markets each generate several hundred billion dollars of revenue annually and support several  companies with annual top lines of $50 billion-plus.

The cannabis industry will one day reach a similar size, and, like the alcohol and tobacco sectors, it will eventually support several  $50 billion-plus companies. HEXO could be one of those companies some day,  but that scenario probably won’t materialize.

The Long Term Outlook of HEXO Stock Is Uncertain

The reality is that there are a lot of cannabis companies today, and, as I mentioned earlier,  most of them won’t survive. As the market matures, it will consolidate around a few large players, as the global tobacco and alcoholic beverage markets did. After this consolidation occurs, a few  marijuana stocks will be big winners, and the rest of the names will fall by the wayside.

The  internet industry went through a similar process. Marijuana stocks in 2019 feel very similar to dot-com stocks back in 1999. Today, everyone is convinced that cannabis will become the next big thing, just as everyone was convinced back in 1999 that the internet was going to become the next big thing.

The masses were right back in 1999, since  today the internet is everywhere. But, between 1999 and 2019, a lot of dot-com stocks disappeared. Only a few titans, like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG), became winners over the long-term.

In other words, back in 1999, there were a lot of dot-com stocks. Most of them didn’t make it to 2019. Only a few did. The few that did turned into huge winners. But an equally-weighted portfolio of dot com stocks assembled back in 1999 would’ve produced awful returns.

Thus, when picking pot stocks in 2019, it’s important to be selective. Don’t expect every cannabis company to become a winner over the long-term. Most of them will be losers over the long-term.

As a result, it’s probably a good idea to only invest in cannabis companies that actually differentiate themselves by obtaining a large investment – see Canopy Growth (NYSE:CGC) – or with huge volumes and growth over the long-term, like Aurora (NYSE:ACB).

Right now, HEXO has not yet meaningfully differentiated itself from the pack. This lack of differentiation is a reason to avoid HEXO stock for the foreseeable future.

The Bottom Line on HEXO Stock

At the risk of sounding like a broken record, I’ll reiterate my thesis on HEXO stock.

There are a lot of marijuana stocks out there. Most of them won’t make it. So probabilities suggest that if you pick a random marijuana stock out of a hat, that marijuana stock won’t produce good returns over the next decade. Because of that dynamic, investors have to be selective when picking pot stocks in 2019.

In other words, they should only pick marijuana stocks of companies that have meaningfully differentiated themselves. HEXO has not done that. Consequently, investors should stay away from HEXO stock until the company finds a way to meaningfully differentiate itself.

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

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/why-hexo-stock-still-isnt-a-compelling-investment/.

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