With Canada’s Cannabis Market Growing, Hexo Merits Attention

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Owing to a U.S. Election Day that couldn’t have gone any better for the industry, cannabis equities, including Hexo (NYSE:HEXO), are on the mend. For its part, HEXO stock participated in the November small-cap rally, entering the Nov. 30 with a month-to-date gain of 19% before surging almost 29% on volume that was more than seven times the daily average on the final trading of the month.

marijuana in storage
Source: Shutterstock

Even with that banner November performance, HEXO stock is down more than 55% year-to-date and would need to double to get back to its meager 52-week high of $2.30. There are other reasons investors should approach this Canadian cannabis company in delicate fashion.

Despite the recent rebound by the stock, Hexo is still a financially challenged company. It lost 38 cents a share in the third quarter, far worse than the 3-cent-per-share loss analysts expected. The company lost $420 million – roughly its current market capitalization – over the past year and it’s cash flow negative to the tune of $152 million.

Those aren’t encouraging data points. Unfortunately, losses and weak to negative cash flow are pervasive across the marijuana industry. Believe it or not, those aren’t indictments of Hexo because the stock, though still risky, offers potential for more near-term upside.

Know HEXO Stock Catalysts

One thing investors need to remember about Hexo is that, at least for the time being, the company isn’t an adequate proxy on increasing legalization of recreational cannabis or any other narcotics in the U.S.

This is the very scenario that vexed marijuana investors for some time. The bulk of the weed stocks trading on major U.S. exchanges are Canadian companies, few of which currently have notable exposure to fast-growing, more lucrative American market. That’s not to say Hexo and its rivals won’t eventually migrate south, but given the current landscape, Hexo is a play on its home market, not increasing American liberalization of marijuana policy.

Fortunately, things are looking up in the once disappointing Canadian recreational cannabis market. Sales at regulated dispensaries hit an all-time high in August and demand for derivatives products, such as cannabis-infused beverages is increasing. That’s integral to the Hexo thesis because its Truss Beverage, a joint venture with Molson Coors (NYSE:TAP), is already establishing market positioning.

For Hexo, this is a feat because it wasn’t that long ago that Canada’s cannabis beverage market was stalling due to supply chain issues and the novel coronavirus pandemic. This is a significant growth frontier for Hexo. In 2018, the Canadian CBD beverage market generated $143.9 million in sales, but that figure is forecast to grow to $533.8 million in 2025.

Not only will cannabis-infused beverages pressure the already slack beer market, but with this being a high-growth business, it eases some of the sting for companies like Hexo that currently lack adequate U.S. footprints.

Bottom Line: Worth a Flier

I’m rarely a fan of low-priced stocks, particularly those operating in competition-intensive consumer cyclical industries.

With Hexo, I’m willing to make an exception for several reasons. First, as noted above, the Canadian dispensary market is firming and Hexo has avenues to augment any weakness in recreational cannabis with beverages.

Second, while it may be some time before Hexo enters the U.S., it does have growth levers to pull outside Canada. For example, it’s marketing Truss in Mexico, a country that’s increasing warm to the idea of legalized recreational cannabis.

Finally, HEXO stock is legitimately undervalued. The shares are at $1.13, but some analysts believe the stock can rise to $1.56, implying significant upside from current levels.

On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Todd Shriber has been an InvestorPlace contributor since 2014.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/with-canadas-cannabis-market-growing-hexo-stock-merits-attention/.

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