The past four months have been worrying for Canadian marijuana firm Hexo Corp (NYSE:HEXO). Hexo’s stock price went from over $8 per share at the end of April to just under $4 at the end of August as market uncertainty and concerns about the marijuana market in general weighed on the sector.
Just a few months ago, pundits were recommending Hexo stock left and right, pointing to the firm’s strategic partnerships and promise for the future as growth catalysts, but today the share price is languishing around the $4 mark.
Downtrend for Hexo Stock
What happened this summer to dull the shine on HEXO? The answer to that is both complicated and simple — absolutely nothing. Hexo stock hasn’t suffered any major setbacks that would warrant a 50% decline. Instead, the firm has been caught up in an overall downtrend in cannabis stocks as investors search for safer investments to combat rising uncertainty.
Marijuana stocks are inherently risky no matter how bright a future they appear to have. That’s because the industry itself is still developing and there are still a lot of regulatory hoops to jump through. No one knows where the pot industry will be in a year — there’s a chance we won’t see any forward movement at all, bringing in an added layer of risk.
On top of that, Hexo is a small-cap stock which, again, is inherently risky. Investors are looking to big names with massive cash coffers that pay secure dividends right now because they aren’t sure where the market is heading. Simply put, that’s the opposite of what you’re getting with Hexo stock and so the firm has been sitting on the sidelines in recent weeks.
Is Hexo Stock a Value Play?
It’s at this point that many investors like myself might be asking whether or not now is a good time to buy Hexo stock.
There’s a lot to like about HEXO’s future — the company is controlling around 30% of Quebec’s marijuana market, a figure that’s unlikely to move much over the next few years. If Canada’s recreational marijuana market grows as expected over the next few years, Hexo has the potential to serve around 10% of the nation’s cannabis market.
Canada isn’t the only place HEXO has the potential to expand either. The firm has aligned itself with Molson Coors Brewing (NYSE:TAP), which provides a clear path toward greater international exposure. Not only that, but HEXO’s partnership with TAP underscores the firm’s commitment to cross-industry partnerships.
HEXO’s plans to make cannabis-infused beverages with TAP is just the beginning to a much larger trend in which marijuana products gain mainstream traction. I believe Hexo’s commitment to expanding into other industries is a smart one as the marijuana market’s limitations and growth avenues are still unclear.
HEXO Earnings on the Horizon
Hexo stock is due to release its fourth quarter results in late October, and the earnings report has the potential to push the share price higher. Revenue is seen coming in around 25.5 million Canadian dollars, an increase from the year-ago quarter. Management also said the company is planning to ramp up its annual production capacity to 108.000 kilograms, which it says will prepare the firm for Canada’s second wave of legalization in October.
The upcoming earnings call should also provide more insight into Hexo’s beverage line Truss as well as the firm’s other cannabis ventures like cosmetics, wellness products, and vapes.
Bottom Line
There’s a reason investors are wary of Hexo stock right now — it’s risky. Although I’d argue that HEXO is probably one of the best marijuana bets on the market, I’m going to wait this one out on the sidelines.
Not only is the wider market suffering from turbulence due to macroeconomic concerns, but the marijuana market itself is still on very unstable footing. If you can stomach the risk, I think Hexo is a great way to play the cannabis market and I believe in the firm’s strategic vision. However, be prepared for some volatility as regulations and skittish investors continue to plague HEXO’s stock price.
If you do buy Hexo stock, I’d be cautious about the size of your position, especially with earnings on the horizon.
As of this writing Laura Hoy didn’t hold a position in any of the aforementioned securities.
