As cannabis legalization garnered steam in North America, the narrative for Hexo (NYSE:HEXO) made sense, at least on paper. For one thing, the Canada-based company had a seemingly robust domestic market. Second, its partnership with the United States-based Molson Coors (NYSE:TAP) in developing cannabis-infused drinks signaled some potential for expansion. But that narrative never quite panned out. Hexo stock took a beating going into the new normal.
Theoretically, the pandemic should have been a positive catalyst for the company. With the shutdown of bars and nightclubs, alcohol sales boomed as people sought both fun and a means to cope. Notably, NPR stated that prioritizing Americans’ access to booze was even a bipartisan effort.
This should have helped Hexo stock. Granted, politics in the U.S. are different than politics in Canada. However, both nations have suffered from lockdowns and the subsequent decline of social and economic activities. That has caused huge amounts of stress. And from what I understand, people love cannabis-based products to take the edge off.
The thesis, however, didn’t stick the landing, leaving many shareholders frustrated. Currently, though, the company is now enjoying a solid month, alongside other marijuana-based investments. Hexo is up about 17% between Oct. 1 and Oct. 26. So, could a recovery be in progress?
Hexo Stock and Investing in Cannabis
Before I get into it, let’s get one thing straight: cannabis-related investments should be considered speculative. This isn’t something to gamble your life savings on. But — as a high-risk, high-reward wager on an embattled industry recovery — Hexo stock just might make the grade.
Overall, the North American economy has been badly wounded by the novel coronavirus. In late September, Canada’s Global News reported that lawmakers there were worried about the outbreak’s “permanent impact.” Here in the States, whoever is elected president come November will also have to deal with a range of economic flashpoints.
Yet with cannabis, you have the potential of building a robust, homegrown market. Further, Canadian-American cooperation is a promising start.
But time isn’t a luxury that Hexo has in abundance. For stakeholders to truly get excited about this beleaguered name, it needs a credible nearer-term pathway. And that path for Hexo may be through a relationship it already has — its partnership with Molson Coors.
The CBD Angle
According to BeverageDaily.com, Hexo and Molson Coors already work together via Truss Beverages, which makes non-alcoholic drinks that are infused with a variety of cannabinoids, including cannabidiol (CBD). The two set up the new Truss joint venture in April of this year. And while this news hasn’t consistently helped Hexo stock in the past, it may have significance in the near future.
That’s because CBD is important to the U.S. cannabis market. The substance contains only a legal trace amount of tetrahydrocannabinol, the psychoactive compound that gives marijuana its signature high. Even more importantly, though, it’s used for several different purposes.
According to a June-July 2019 Gallup poll, 14% of Americans say they use CBD products. A majority (40%) consumed CBD for pain relief and management. However, several people used CBD for anxiety (20%), sleep-related issues (11%) and stress (5%).
On the surface, 14% of Americans may not sound like a whole lot. But this was before the novel coronavirus. In the new normal, the paradigm has shifted altogether.
In the United States, we’ve lost over 200,000 Americans to Covid-19. It’s also possible that a second wave is coming. So are more people anxious and stressed than in 2019? I think that qualifies as a dumb question.
And that’s just the tip of the iceberg. In September, the Washington Post stated that the pandemic was “ruining our sleep.” Health officials have warned that “coronasomnia” could “imperil public health.”
Cynically, this all supports the case for CBD demand — both now and after the pandemic. And that may trickle down to Hexo stock.
Drinks Are a Way to Evangelize Cannabis
One of the roadblocks for cannabis investments, however, is stigma. Even many people consider CBD — which has no high — to be taboo. If this weren’t so, I would argue that CBD consumption should be much higher than what the Gallup poll indicated last year.
To me, what the poll also indicated — aside from how many people used the substance and why — was that straight CBD was having trouble converting Americans with pre-conceived notions. The bad boy image of cannabis has likely prevented them from considering it as a safe and viable option.
Now, however, even people who turned their noses up at cannabis are stressed out and seeking remedies because of the pandemic. This provides a pathway for conversion. What’s more, products like Hexo’s will be far better at converting those potential customers. To put it simply, it’s much easier to convince someone to drink a CBD-infused beverage than it is to hand them a vaporizer. That’s where the company stands to gain.
Of course, this narrative isn’t going to take away from the risky elements impeding Hexo stock. But at least now the environment is far more favorable for the gamble.
On the date of publication, Josh Enomoto held a long position in HEXO.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.