I’ve followed the cannabis space for a long time now, and in my years observing marijuana stocks, I’ve come to one very important conclusion: there are a lot of pot stocks out there, but only a handful of them will turn into long-term winners. Most of them will fall to zero in the long-run.
This is an important observation to keep in mind when thinking about HEXO Corp (NYSE:HEXO) stock. HEXO is yet another Canadian cannabis company which wants to take over the world with its cannabis-infused products. Also, like many of its peers, HEXO is selling investors the pipe dream that it can be a very important player in what looks poised to become a multi-hundred billion global cannabis market.
That may happen. If it does, those who buy Hexo stock now will be making the investment of a lifetime.
But Hexo stock probably won’t make that dream come true. Instead, the most likely outcome for HEXO isn’t billion-dollar profits. Rather, the company will probably get squeezed out of the cannabis market by larger and better-equipped players.
That’s why, time and time again, I’ve told investors to stay away from Hexo stock. I’m reiterating that recommendation today. Until the company gives investors some tangible and convincing reason why it will be a long term winner in the cannabis market, investors should stay away from HEXO stock.
Lots of Players, Very Few Winners
Here is an accurate, common-sense concept that investors tend to forget every time a new growth market emerges. Early-stage growth markets usually attract many companies. but late-stage growth markets usually have only a few winners.
When growth markets are in their early stages, everyone and their best friend wants to get into the space because it has so much long-term growth potential. As a result, a bunch of companies emerge in early-stage growth markets. But the markets cannot support all that supply, since demand is finite.
Consequently, as the market matures, a few companies become large players, and they proceed to wipe-out everyone else in the space. As a result, 95% of companies in early=stage growth markets disappear, while 5% turn into long-term winners.
That has happened time and time again throughout the course of U.S. history.
Think about the emergence of the internet space. Many internet companies like Boo.com, Webvan, Pets.com, Kozmo, Geocities emerged initially. But of the thousands of dot-com companies that were launched during the late 1990s, only a handful – like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG) – survived and thrived over the long-term.
Or think about the emergence of the blockchain in 2017-18. The shares of any company that said it was somehow involved with the blockchain went parabolic. Now, even though bitcoin has staged a meaningful recovery, many of those “blockchain companies” are no longer relevant. For example, take a look at a three-year chart of Overstock.com (NASDAQ:OSTK).
All new growth markets go through the same cycle. Investors get euphoric about them. A bunch of companies emerge in an effort to capitalize on that euphoria. The shares of all those companies rally as though they will all turn into long-term winners, but only a few achieve the dream. The rest suffer a painful demise.
The Cannabis Industry Is No Different
The unfortunate reality is that the cannabis industry will endure a cycle that is similar to what the internet space and the blockchain industry experienced.
That means that of the hundreds of cannabis companies out there today, only a select few will become winning investments over the long-term.
Right now, Hexo stock is not well-positioned to become one of the sector’s long-term winners. The company sold less than 3,000 kilograms of cannabis last quarter, far less than the 10,000-plus kilograms per quarter that the industry leaders sold. Last quarter, HEXO’s’s sales volume rose 9% versus the previous quarter. That’s unimpressive relative to the double-digit-percentage growth rates that most other cannabis companies are delivering. In Q2, its net revenue actually dropped quarter-over-quarter, and its net loss widened . Its balance sheet, with about $130 million in cash, is very small relative to the multi-billion dollar balance sheets of Canopy (NYSE:CGC) and Cronos (NASDAQ:CRON).
In other words, there’s nothing terribly special about Hexo stock which will enable it to become a long-term winner.
Unless the company does develop such a catalyst, HEXO stock price will most likely end up at zero.
The Bottom Line on Hexo Stock
Stay away from HEXO for the foreseeable future. At this point, HEXO appears to be an unattractive company in the right space. But that could all change, and quickly. If it does change, Hexo stock price will turn into a long-term multi-bagger.
But until that happens, HEXO stock is facing enough risks to warrant staying on the sidelines for the time being.
As of this writing, Luke Lango was long CGC.
