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4 Reasons to Buy Hexo Stock Despite the Rough Ride

The first half of this year has been a roller coaster ride for pot stock investors, and particularly for those in Toronto-based Hexo Corporation (NYSE:HEXO) stock. After dipping below $5 per share at the start of the year, Hexo stock rallied up to $8.40 in late April, but has since slumped back down to $4.52.

4 Reasons to Buy Hexo Stock Despite the Rough Ride
4 Reasons to Buy Hexo Stock Despite the Rough Ride

Source: Shutterstock

Despite the recent bear run, here are four key reasons why Hexo might be a good long term bet.

Growing Revenues

While the sales Hexo reported for the third quarter of 2019 may have fallen short of analysts’ lofty expectations, the numbers are still amazingly strong.

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Yes, the company is burning cash, with a negative operating cash flow, and it suffered a net loss of 4 cents per share. But at this early stage, the stock market is not looking for bottom-line results. Instead, top line revenue growth, production rates and market share are the factors that will drive the Hexo stock price.

Using these parameters, Hexo’s forecast that it will double its revenue this year and will surge to $300 million by the end of 2020 will be the key driver in Hexo stock.

Hexo Stock Is a Leader of the Pack

In early stage growth cycles, size does matter. And Hexo is slowly emerging as a leader of the pack. Even at today’s depressed Hexo stock price, it has a market cap of over $1 billion and has clearly established itself as a leading supplier to several Canadian provinces.

Apart from recreational and medical marijuana, Hexo has also diversified into other areas, such as its award-winning line of elixir sprays. Putting Hexo clearly in the big league as a credible national distributor, Hexo has also partnered with Molson Coors Canada, owners of the Truss Beverages startup, to produce a cannabis-infused canned drink.

In terms of increasing scale, Hexo’s recent acquisition of Newstrike brands has given size to Hexo stock, making it a key player in the pot stock sector. Newstrike started cultivating marijuana in December 2016 and has since scaled capacity up to 42,000 kgs annually. The $260 million all stock deal also addressed some concerns that Hexo was merely a takeover target rather than a credible standalone player. Combined, the new Hexo will command an annual production rate of over 100,000 kgs by year end.

Broader Investor Base

Hexo has transferred its stock market listing to the New York Stock Exchange from the smaller NYSE American exchange effective last month. The shares are now swimming in the adult section of the pool and may appear on the radar of more institutional portfolio managers.

Marijuana Mania and Swing State Voters

It’s election season. For the rest of this year and most of 2020, national medial will be sprinkled with sound bites from the candidates about their views on legalization of marijuana at the U.S. federal level. Seeking to capture the key 20-something sway voters in states like Ohio, Michigan and Florida — and witnessing the huge tax revenue reaped by the state of Colorado in the years since legalization — most Democratic candidates are decidedly pro-pot.

New Jersey Senator Cory Booker last month introduced the Marijuana Justice Act, which would remove the drug from the federal list of controlled substances and expunge past convictions. Supporters of legalization note that African-Americans are almost four times more likely to be arrested for marijuana possession than whites, even though rates of use are similar.

“It’s not enough to legalize marijuana at the federal level — we should also help those who have suffered due to its prohibition,” Booker said.

Other 2020 presidential candidates quickly endorsed the Act, including Bernie Sanders, Elizabeth Warren, Kamala Harris and Kirsten Gillibrand.

Even the uber-cautious Beto O’Rourke, who often hedges when asked about contentious issues, has supported unequivocally the federal legalization of marijuana. O’Rourke believes that legalization is a matter of practicality and racial justice. African Americans and Latinos are imprisoned at disproportionate rates compared to whites for minor marijuana offenses.

And on the Republican side, although President Donald Trump has remained largely silent on the issue, many analysts believe he will push for federal legalization – and use that message to clinch the electoral vote in the must-win swing states.

“By supporting cannabis, Trump may be able to incrementally broaden his appeal with swing voters without alienating his base,” according to Piper Jaffray analyst Michael Lavery at a recent conference on marijuana legalization.

The specter of any type of credible federal legalization of marijuana under the next presidential administration could rocket Hexo stock well past the $10 mark.

Yes, there may still be some downside to Hexo stock price in the weeks ahead. Yes, there may still be losses in Q32019.

But projecting out for the rest of the year and into 2020, Hexo looks like an opportunity to buy on the dips.

As of writing, Theodore Kim did not own any position in Hexo. 

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