Canadian cannabis producer Hexo Corp (NYSE:HEXO) was up a whopping 115%-plus within the first six months of the year. After rallying from $3.84 to $8.28, HEXO stock now trades 51% lower at $4.06. All as investors lost confidence with a spate of industry setbacks and an earnings disappointment from the three months ended in late April 2019.
That said, if you’re an investor who’s in it for the long haul, you may want to considering buying HEXO stock at a major discount here. Here’s why:
What’s In Store for HEXO Stock?
The cannabis market has been weak, and HEXO has suffered. However, there are several reasons investors may want to buy shares at these levels. For one, the company is well-positioned to benefit from the long-term potential of the cannabis story. With its hand in consumer products and medicinal marijuana, HEXO has the best of both worlds.
Research surrounding medicinal marijuana has been on the uptake, with the Center for Medicinal Cannabis Research (CMCR) recently announcing $3 million in new research grants for investigators in California. These investigators look into the efficacy of clinical trials, such as conducting proof of principle clinical trials which test cannabis’ effects on neuropathic pain and multiple sclerosis.
One active study, led by Thomas Marcotte, professor of psychiatry at the University of California, San Diego, seeks to discover how vaporized cannabis can treat lower-back pain. If this study bears out, then marijuana could become a clearer option than highly addictive, dangerous opioids that are currently used to treat things like back pain.
What’s more: Canada just legalized cannabis use in late 2018; U.S. states are just beginning to approve its use; and Congress has introduced several bills to decriminalize it. The Farm Bill became a major catalyst, as did corporate America. In fact, cannabis is just beginning to disrupt major industries, including alcohol, pharmaceuticals and even health, beauty and wellness. All as consumer interest in cannabis improves.
Retailers have been racing to keep up with consumer demand. Abercrombie & Fitch Co. (NYSE:ANF), Vitamin Shoppe Inc. (NYSE:VSI), Kroger Co. (NYSE:KR), CVS Health Corporation (NYSE:CVS), American Eagle Outfitters (NYSE:AEO) and Walgreens Boots Alliance Inc. (NASDAQ:WBA) are all now selling cannabis products. The Brightfield Group says worldwide cannabis sales are expected to soar from $591 million in 2018 to as high as $22 billion by 2022. Arcview Market Research and BDS Analytics foresee worldwide sales passing $16.9 billion this year.
Better, HEXO continues to grow its production line, expanding its footprint to 1.8 million square feet of production space, and 638,000 square feet of manufacturing and distribution space with annual production of 150,000 kilograms.
In addition, HEXO acquired Newstrike Brands Ltd., which adds 150,000 kilograms of annual capacity along with four additional production campuses.
Partnership With Molson Coors Brewing
HEXO’s partnership with Molson Coors Brewing (NYSE:TAP) is also critical for growth. In October, Canada will allow for the sale of cannabis-infused beverages and edibles a year after approving the sale of dried cannabis flower, oils and sprays. That partnership with TAP, and Canadian legalization, will allow HEXO to benefit from cannabis-infused beverages.
The only downfall is that the selling of those products won’t be allowed until December 2019 thanks to permit requirements. Still, the market holds multi-billion-dollar spending potential, especially when you consider that up to 60% of Canadians would use cannabis edible products, according to Deloitte.
The Bottom Line for HEXO
While a 52% drop in the HEXO stock, it’s understandable for investors to be nervous. After all, no one wants to invest and lose money.
However, it appears the market has become far too negative. Long-term industry growth is solid. Canada is getting set to legalize the sale of cannabis-infused beverages and edibles, and the company has strong production numbers from its recent acquisition.
For long-term buy and hold investors, HEXO does appear attractive at current prices.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.