Much like Cannabis 1.0, Cannabis 2.0 is going to take longer to get rolling than most people realize. Companies such as Hexo (NYSE:HEXO), who’ve invested heavily in the edibles and cannabis-infused drinks market, are going to have to be a lot more patient. And, if you’re betting on a Hexo stock revival, that’s terrible news.
However, don’t despair.
Hexo’s joint venture with Molson Coors (NYSE:TAP) will deliver much-needed relief for the Hexo stock price, which has lost 76% of its value since hitting a 52-week high at the end of April. Nonetheless, it is going to take time.
If you’re looking for positive Hexo analysis from other InvestorPlace.com contributors, you won’t find many takers. The company’s first quarter earnings report for 2020 certainly didn’t help.
My colleague, Vince Martin, suggested before Hexo released its earnings Dec. 16, that it needed a good report or bankruptcy could be on the horizon.
“A weak first quarter puts fiscal 2020 targets in doubt immediately, and adds to concerns about whether management truly is on top of the business and industry dynamics. Q1 results aren’t going to seal Hexo’s fate one way or the other, but they will drive the sentiment toward HEXO stock into 2020.” Martin wrote.
Hexo reported top-line sales of 14.5 million Canadian Dollars (CAD) in the first quarter of 2020, 1.1 million CAD short of analyst expectations. On the bottom line, it lost 62.4 million CAD — more than double the consensus estimate for the quarter.
That’s a swing and a miss.
HEXO has lost about 10% of its value since the report, but lost nearly three-quarters of its value in 2019. So, 10% is a walk in the park.
From where I sit, Hexo’s risk-reward profile is beginning to look very favorable for investors willing to stick their necks out. Here’s why.
Former Canopy Growth (NYSE:CGC) CEO Bruce Linton recently told BNN Bloomberg he expects investors to return to cannabis stocks in the near future in large part because of Cannabis 2.0.
“I’m really excited about [the first quarter] because I think you’ll actually see reasons to go to the stores that exist and a bunch of more stores [opening] so these advanced products could be things that don’t exist anywhere else on the planet,” Linton said during an interview.
“The level of enthusiasm and anticipation for that, I think, is not on par with what is being presented. So I think in January and February, a lot of retail [investors] are going to see these products and want that stock that makes that product.”
As Hexo CEO Sebastien St-Louis stated in its first quarter 2020 conference call, the company has a lot invested in its Truss joint venture.
“Truss has been funded with an aggregate of about 80 million CAD to date, Hexo providing 43% of that capital. And we have a little bit of funding left to go. I think an aggregate funding of about CAD26 million left to go in that total. So — which would leave Hexo with 43% of that, call it 12 million CAD. And that covers both capex and OpEx. Also the capex has been deployed. The Truss facilities are gorgeous, 180,000 square feet of state-of-the-art beverage manufacturing in our Belleville facility.”
Think about it.
Hexo has spent millions of dollars to get a state-of-the-art beverage manufacturing facility that already has CBD beverages in the pipeline. With this, the hope is to sell THC and THC/CBD drinks under several brands starting in the calendar year 2020.
As Linton suggests, investors are way too conservative when it comes to the potential of Cannabis 2.0 products — and I couldn’t agree more.
Since the dry flower’s legalization in Canada in October 2018, I’ve bought zero products. Except for a relative of mine, who smokes pot for pain relief.
However, I’ll be there to purchase drinks and edibles when they’re readily available; and I think a lot of Canadians feel this way, too.
With the provinces starting to get their retail act together, the Truss joint venture is going to have ample opportunity to capture market share in Canada. In the meantime, Hexo can sell its low-priced brand — Original Stash — meant to attract black market buyers.
But, the real profits will come from Truss and other Cannabis 2.0 initiatives.
Hexo’s current Altman Z-Score is 2.58, which is within spitting distance of being considered safe from bankruptcy. This comes even after a so-called terrible first quarter.
The people who just bought 70 million CAD in Hexo 8% convertible notes — which come with an exercise price of 3.16 CAD — are sitting in the catbird seat because they’re getting paid 8% to wait for Hexo stock to reach its potential.
I would have loved to have gotten my hands on some of those notes because Hexo’s demise is greatly exaggerated.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.