On Oct. 30, Hexo (NASDAQ:HEXO) announced that it was consolidating its shares on an 8-for-1 basis so that HEXO stock could regain compliance with the New York Stock Exchange’s minimum $1 share price requirement.
In the six weeks since its announcement, HEXO has risen 69% and is trading a few pennies above $1. For this reason, the company announced on Dec. 7 that it was scaling back the consolidation to four old shares for every one new share, increasing the number of shares outstanding by a factor of two.
And that’s an excellent thing. Here’s why.
HEXO Stock Looks Like It’s Bottomed
It looked as though Hexo’s shares were headed for the dustbin of public-company history for a while there.
In the past year, Hexo’s shares have only traded lower than they did at the end of October on one occasion, and that was in March when they hit 34 cents at the beginning of the pandemic. It seems so long ago that HEXO traded around $8; it was a mere 20 months ago. Boy, have times changed.
The last time I wrote about the Canadian cannabis company was in early November. I argued that despite it being a crappy year, it had three joint ventures that could pull it out of its downward spiral.
The most promising being its 42.5% interest in Truss Beverages, a partnership with MolsonCoors (NYSE:TAP), who owns 57.5% and is the operating partner.
I finished the article with a note of optimism.
“I’ve been waiting for Hexo to reach its potential for some time. Thanks to this trio of joint ventures, 2021 could be the year it actually does,” I wrote on Nov. 6.
A little over a month later, I wonder if anything has happened with Hexo other than a smaller consolidation ratio that justifies my ongoing belief that it will eventually be successful.
Truss Continues to Be the Savior
For several years now, I have said that the cannabis industry will only be truly successful from a recreational use standpoint when cannabis-infused beverages and edibles become the norm in the industry.
It’s a simple rationale: If I get 20 of my high school and university friends together (I’m 56) for a party — well, not right now, given Covid-19 — I can guarantee you that if pre-rolled joints were on the table, almost everyone would take a pass.
That’s because most of these people haven’t inhaled anything down their lungs, except maybe the occasional use of an inhaler for people with asthma, in years.
At the same time, almost all of them enjoy the occasional beer, wine, or cocktail. A THC/CBD infused gummy or strawberry rhubarb seltzer would do fine as a stand-in. But it would have to taste drinkable. I doubt many of them have something just for the buzz.
Post Media’s GrowthOp recently discussed this very idea:
Challenged to create brand identity in the flower market, the promise of many big cannabis companies resides in the ability of their cannabis beverages (HEXO with TRUSS, Canopy with Tweed and Houseplant, Tilray with Fluent, and Aphria with SweetWater Brewing, etc.) to win over the non-cannabis consumer. For this to happen, cannabis beverage companies must escape the ‘tobaccoization’ of cannabis.
Ultimately, contributor Pierre Killean, who is the executive director of the Institute on Cannabis, argues that cannabis companies such as Hexo will have to work diligently to separate Truss beverages from its other products such as Original Stash, which are smoked or vaped.
I couldn’t agree more.
The Bottom Line
Without the general public understanding that a 2 milligram THC beverage has the same effect as a glass of wine or beer, the non-cannabis consumer will continue to take a pass on cannabis beverages because they mistakenly will believe it’s somehow more potent.
And that’s not the case.
It’s much like comparing a regular bottle of bourbon with 40% alcohol by volume to cask strength at 60% or higher. Two glasses of the former might make you tipsy, while two of the latter could put you down for the count.
MolsonCoors, like all of the big beverage companies, understands how to educate consumers on responsible drinking, whether it be beer, wine, spirits, or cannabis-infused beverages.
I continue to believe that Hexo’s best hope is Truss Beverages. Now that it’s got a share price high enough to stay on the NYSE, I’d look for good news in 2021 to push it to $2 and beyond.
It’s been a rough ride for the Quebec company, but patient investors ought to be rewarded.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.