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Don’t Buy Hexo Stock as It Continues to Drop

Hexo's joint venture partner, Molson Coors, is the better investment right now

The price of Hexo (NYSE:HEXO) stock continues to decline. HEXO stock fell down to the $4 threshold this past week, and has now declined more than 50% from its recent peak. Like industry rivals Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC), Hexo stock has faced relentless selling.

Especially Under Current Conditions, Stay Far Away from Hexo Stock
Source: Shutterstock

Hexo stock has largely declined because of the huge drop in marijuana shares in general. With the industry producing far more marijuana than consumers demand — particularly in Canada — everyone is suffering. That said, Hexo has potentially stepped into a company-specific problem with its advertising strategy. It remains to be seen if the skeptics’ arguments about Hexo’s marketing strategies end up hurting the business or not.

Hexo’s Joint Venture With Molson Coors

In a recent article on HEXO, Will Ashworth suggested that Hexo’s partnership with Molson Coors (NYSE:TAP) acts as a floor to support Hexo’s stock right now. The thinking is that the Hexo/Coors joint venture (JV) can start distributing CBD drinks in Canada when they are legalized in December. Hexo has a large supply of CBD ready, so they should be able to hit the ground running once the legal red tape is taken care of.

Ashworth suggests that this JV could deliver $175 million in revenues in coming years. Combined with the projected Quebec market for dried flower, and Hexo stock would be selling at 2.2x its realistic sales in a few years. This is a solid bullish argument for Hexo stock.

On the other hand, we’ll have to see how this all plays out in practice. Hexo and Molson Coors are far from the only companies trying to commercialize CBD drinks. Even if they are successful to this extent, how much will it help Hexo’s stock price? Keep in mind that TAP stock only trades for 1.1x today’s sales. That’s despite Molson Coors also trading at a 12x P/E ratio and paying a more than 4% dividend yield.

I’m not sure Hexo stock should trade at a much higher sales ratio than Molson Coors, even assuming its projected revenue growth eventually plays out. You can make a good case for owning Molson Coors’ stock today, instead of Hexo. Collect the fat dividend in the meantime, and if this JV works, it should give TAP stock a strong growth element that will cause investors to bid its shares back up. Unlike Hexo, Molson Coors has huge cash flows and profits from beer to fall back on in case its CBD drinks don’t take off.

Hexo Bulls May Be Overlooking These Two Concerns

Our Vince Martin made some excellent points in his recent Hexo stock article. For one thing, he pointed out that Hexo’s dominance in the Quebec market is far from guaranteed in the future. Hexo achieved a significant first-moved advantage, getting a favorable contract with the provincial government.

However, that contract appears to only run for one year, and it’s not guaranteed that it will be renewed indefinitely. Competition has grown significantly since Hexo took its lead in the Quebec market. And now there’s the advertising issue which could hurt the company’s credibility in getting its contract extended. People banking on Hexo retaining a 30%+ share of the Quebec market may end up disappointed.

The other concern is that Hexo has built a chunk of its strategy around being a leading food ingredients company. However, Quebec has already cracked down on CBD candies, and the national government may follow its lead. Investors will need to watch how regulation in this market develops, as a heavy touch would be bad news for the Hexo stock price.

Hexo Stock Verdict

I’ve been bearish on HEXO stock since May, when I said it would be unable to live up to its rising stock price. Even with Hexo now trading sharply lower, there’s still little that would compel investors to get involved today.

That’s not to say that Hexo stock is without any merit. But in a marijuana sector that is taking blow after blow, you need some specific characteristic or catalyst to get excited about. There’s just not enough that makes Hexo stand out right now. If you want exposure to the CBD-infused beverages business, TAP stock seems like a much better choice at this juncture.

Remember that Molson Coors owns 57.5% of the beverages joint venture with Hexo. On top of that, Molson Coors has warrants to buy a large chunk of Hexo stock at $6 per share. Thus, if the partnership goes well, TAP stock owners will get a lot of the economic benefits. Sure, Hexo would have more upside than TAP if everything goes perfectly. But if there are any bumps in the road, Molson Coors will be the much safer holding of the two going forward.

At the time of this writing, Ian Bezek owned TAP stock. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/dont-buy-hexo-stock-as-it-continues-to-drop/.

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