Despite the broader positive implications of cannabis legalization, individual players have not performed well this year. That goes five-fold for one of my favorite speculative picks, Hexo (NYSE:HEXO). Like other names in the industry, HEXO failed to impress stakeholders with substantive financial results. However, this October has been particularly brutal to the Hexo stock price.
Earlier this month, management made a gut-wrenching disclosure: due to slower-than-expected store rollouts in its native Canada, the company reduced net revenue expectations by roughly 40%. Adding insult to injury, the cannabis firm also withdrew its fiscal year 2020 outlook. Previously, management suggested they were on pace to hit 400 million CAD in revenue.
Because of the dreadfully disappointing news, the Hexo stock price had nowhere to go but down. The fallout even dragged down major names like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). And just recently, HEXO announced that they will postpone their fourth-quarter earnings report to Oct. 28.
Even though I’m bullish on the cannabis sector and a shareholder of Hexo stock, I must admit the obvious: what has transpired is a dark comedy of errors.
That said, I’m not panicking. Instead, I’m eyeing longer-term trends that could eventually revive the deeply distressed Hexo stock price. Here are five reasons I’m optimistic (and I’ll let you decide if I’m delusional).
Bad News for Hexo Stock Is Baked In
I know this is an incredibly overused term. Believe it or not, I try to avoid it if possible. However, with HEXO, I think the phrase is more than justified: the bad news is baked in.
Let’s address the obvious: what really took down the Hexo stock price earlier this month was management’s decision to concede failure. They lost this game; thus, it doesn’t make sense for the company to lose the same game twice.
And since this shock, bearish traders haven’t really pushed shares to new, agonizing depths. In fact, HEXO has so far stabilized above $2.50.
Moreover, the disappointment and embarrassment could represent a silver lining. Nothing corrects improper behavior faster than pain. After suffering the consequences of aggressive expansionary strategies, management will likely adopt a more fiscally responsible approach. Over the long haul, that’s net positive for Hexo stock.
Product Diversity Bolsters HEXO
Aside from poor financial performance, another reason why cannabis stocks floundered was the vaping crisis. Currently, the Centers for Disease Control and Prevention acknowledge 33 deaths across 24 states from alleged vaping-related illnesses.
While health officials are still searching for a culprit, they have targeted vaping with illegal substances, such as THC, the psychoactive compound associated with the marijuana plant. And because the public uses the terms cannabis and marijuana interchangeably, companies specializing in cannabis-based vape products suffered from association.
I could go all day about the difference between legal hemp-derived cannabis products and THC, but I’ll save that discussion for another time. For now, an important point to consider is product diversity. Cannabis platforms extend beyond vaping and smoking and into areas such as edibles and ointments.
A platform that’s especially popular is cannabidiol (CBD)-infused beverages. Here, HEXO has a partnership with Molson Coors Brewing (NYSE:TAP) to deliver such beverages. And they’re doing exactly that, with CBD-infused spring water set to launch in Canada next month.
As I’ve argued before, beverages and other consumable products are non-offensive platforms. Thus, those who are curious about CBD can do so without the stigma associated with other platforms (i.e., smoking a joint).
Growing Endorsements from Professional Athletes
In the digital and social media age, nothing is more effective than an endorsement from a celebrity. Admittedly, HEXO isn’t as big on celebrity endorsements – unless you count the Tragically Hip. However, the company ride on the coattails of other companies that are.
A prime example is cbdMD (NYSEAMERICAN:YCBD). If you take a look at their website, you’ll notice high-profile, successful athletes have jumped aboard the cbdMD train. In my opinion, one of the most notable endorsement deals involves golfer Bubba Watson.
A two-time Masters champion, Watson is a crowd favorite. Notably, he inked a multi-year sponsorship deal with cbdMD. What’s particularly remarkable about this news is that golf is a sport that caters to older, affluent individuals.
By logical deduction, I don’t think it’s a stretch to assume that the average golf fan leans politically conservative. And in this environment, Watson — again, a crowd favorite — will showcase legal cannabis to the world.
Granted, the benefit is mostly toward cbdMD. However, curious minds will surely gravitate toward the cannabis industry as a whole. And that, I believe, is a positive for Hexo stock.
Illegal Cannabis Will Decline
For years, proponents of legal cannabis argued persuasively that legalization will disincentivize the underlying criminal trade. After all, why risk procuring weed illegally if you can get it through perfectly legal channels?
While a reasonable assertion, it just hasn’t rung true. For example, Canada’s illegal green market “remains robust.” In the second quarter of this year, illicit spending totaled 918 million CAD. That translates into 60% of the overall market.
Naturally, illegal sales will take a bite out of Hexo stock, along with the competition. However, botanical experts predict that by 2024, black market cannabis will only represent 14% of total sales. Put another way, a sizable headwind will virtually disappear.
Jobs, Jobs, Jobs
In the same study regarding illegal cannabis in Canada, experts noted that in five years’ time, the cannabis industry will essentially create more than 75,000 jobs.
Opponents of cannabis legalization — typically for moralistic reasons — often overlook the comprehensive benefits of the plant. Especially with the global economy strained from hot-button issues like the U.S.-China trade war, no country can afford ignoring potential avenues for job growth.
Additionally, the labor market forecast isn’t based merely on theory. In the U.S., the cannabis industry represents the fastest-growing job market. In my opinion, whatever political resistance exists will fade very quickly when money (and votes) are involved.
Of course, job growth doesn’t directly impact Hexo stock. But it will influence the scope of legalization internationally, potentially expanding the company’s revenue base.
As of this writing, Josh Enomoto is long HEXO. He is also considering acquiring a long position in YCBD in the next 48 hours.