It’s becoming a sad, familiar scene in the broader marijuana industry. Like so many other sector players, Hexo (NYSE:HEXO) started out this year on fire. But as we flipped the pages of the calendar, investors started to see less appeal for botanical goods. As a result, the Hexo stock price has charted a severely bearish trend channel since late April.
In my opinion, some of the negativity is unwarranted. Whether we like it or not, cannabis stocks tend to move in sympathy with each other. That’s great when we have collectively bullish news, such as Canada legalizing recreational weed. But negative events, such as the CannTrust (NYSE:CTST) controversy, have hurt the Hexo stock price.
In early July, Canadian health officials discovered that CannTrust illegally grew cannabis in unlicensed rooms. That set off a wildfire within the industry, which so far culminated in CannTrust firing its CEO. While this incident has nothing to do with HEXO, cannabis companies eagerly seek legitimacy and credibility.
Unfortunately, this incident was incredibly unhelpful for Hexo stock. Since the incident came to light, the company’s equity has plunged roughly 16%.
That said, let’s face facts: Hexo stock has enough of its own problems on paper to justify its volatility. For instance, while its fiscal third-quarter earnings results weren’t terrible, they failed to meet analysts’ expectations for per-share profitability. And this is where the honeymoon phase has dried up for HEXO: Wall Street wants substantive results, and they’re not getting it.
Naturally, many folks are saying to hold off on buying Hexo stock until this situation improves.
Hexo Stock Primed to Advantage Key Demographic Reality
Personally, I’m speculating on HEXO, so I’m biased. Nevertheless, I can see the wisdom in a patient approach. For example, my InvestorPlace colleague Todd Shriber recommended waiting out shares until they stabilize.
This is very sound advice. If we were talking about blue chips, I would say the same thing ad nauseum. However, we’re talking about the cannabis industry. It’s unlike any other sector because we don’t know legal marijuana’s ceiling.
If we see federal legalization of weed in the U.S., it can skyrocket the Hexo stock price, along with peers like Aurora Cannabis (NYSE:ACB) and Cronos Group (NASDAQ:CRON). But if Canadian legalization is the industry’s peak, well, I would have made one of my dumbest moves yet.
Logically, most cannabis companies are banking on the U.S. legalization potential. Politically, I believe momentum favors the optimists. Thus, I’m not overly concerned about HEXO’s expansionary efforts because I believe their efforts will be rewarded in the long run.
But along the lines of marijuana being an unprecedented market, we must also appreciate their target consumer base: millennials. While most of the country supports marijuana legalization, millennials overwhelmingly (74%) support the cause.
More importantly for the Hexo stock price, evidence indicates that millennials are narrative-driven investors. CNBC calls it emotional investing. But the bottom line is that young people are guided by purpose and principles. Therefore, their investments are more likely to reflect their lifestyle or personal ethos.
And that truly augurs well for HEXO. I’ll concede again that on paper and against traditional financial metrics, the company doesn’t look too hot. But really, who cares? I don’t mean to sound flippant, but their target audience is youthful investors, not stodgy, “by the book” baby boomers.
Look at HEXO Through a Young Person’s Lens
Lately, bearish stories about legal marijuana have a recurring theme: don’t jump aboard because the industry is unproven and unstable. They may throw in specific details about the financial statements, such as negative income trends.
All of these things and more are true for Hexo stock. But again, bear in mind that the underlying company’s target audience is young people. They’re least likely to care as much about the financials. Instead, they’re looking for a convincing narrative.
HEXO has that in spades. Moreover, shares have a cheap ticket price. That’s also important for younger millennials, who are burdened with college debt and other life expenses.
Don’t get me wrong: Hexo stock is still an incredibly speculative and risky name. But its potential for an upswing isn’t nearly as ludicrous as you might think.
As of this writing, Josh Enomoto is long HEXO.