Want to Play US Cannabis Legalization? Hexo Stock Is a Great Option

Perhaps no group is more happy about a Democratic House and Senate than cannabis investors. A blue sweep has provided momentum for the cannabis sector once again, and Hexo (NYSE:HEXO) stock is poised for further growth.

Dollar cut out in the shape of a marijuana leaf, used in HEXO stock article

Source: Shutterstock

Talk of potential Federal U.S. legalization has stoked stock prices across the cannabis sector. And there are a ton of options for investors looking to play this space. Picking the best companies out of the bunch to gain exposure to this tailwind is going to be key to maximizing returns.

Here’s why I think Hexo could be a great U.S. legalization play right now.

Hexo Stock: Cannabis-Infused Beverage Model Attractive

Cannabis as a wholesale commodity is rather unappealing. Profit margins on dry flower are likely to trend downward over time, like most raw commodities. Of course, growing market shares across is a focus for most companies. However, I think when investors start demanding profitability from these cannabis producers, only companies with strong market shares in value-added products will be able to produce the best results quickly.

The rapid growth of cannabis-infused beverages makes this business an attractive for investors. In my opinion, this is where a large amount of investor attention in the Cannabis market will go in coming years.

Accordingly, Hexo has been a leading player in developing cannabis-infused beverages. The company has developed a line of drinks under its Truss banner in Canada. This is currently the leading line of cannabis-infused beverages in the country. Truss operates as a partnership between Molson Coors (NYSE:TAP) and Hexo. It’s clear that Hexo’s backing is strong and its foresight in this product will likely serve the company well.

All Eyes Now on U.S. Market Entry

The Truss partnership has dominated the Canadian market, although most investors are focusing on Hexo’s entrance into the U.S. market. Hexo entered the Colorado market in January, using Molson Coors’ distribution lines. The partnership provides HEXO stock with an immediate head-start on its competition.

This partnership is a huge deal, and could propel this stock to new heights.

In addition, a partnership deal in Europe to mimic the North American deal with Molson Coors is expected. Hexo will want to develop global leadership in the key cannabis-2.0 markets it’s targeting.

Current Preferred Contracts Beneficial to HEXO Stock

Until a large-scale U.S. expansion comes to fruition, Hexo has an attractive position in regional Canadian markets. The Quebec-based company has preferred growing contracts with the Quebec Provincial government. As with other industries, this Province has been highly accommodative toward home-grown businesses. This is a key competitive advantage that should allow Hexo to dominate a regional market in Canada over the medium-term.

However, Hexo has been slowed by a less-than-ideal pace of orders from the Quebec government. Unfortunately, a slow rollout in various regional Canadian markets created a supply glut, and hurt producers’ fundamentals. Moreover, the pandemic has helped slow growth across Canada to a halt in recent quarters.

Given the fact the company is dealing with one monopoly customer (the government), one might be concerned about HEXO stock being impacted by downward margin pressures. However, given the support the Quebec government has given Quebec-based companies, I’d anticipate future contracts will remain lucrative in favor of HEXO stock.

With the pandemic (hopefully) winding down later this year, we could see cannabis store openings accelerate. The fact that Hexo is the preferred supplier for regional markets in Eastern Canada is bullish for investors looking to pinpoint winners in this market.

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


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