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Better Marijuana Stock: HEXO vs. MedMen

Keith Speights, The Motley Fool

HEXO (NYSEMKT: HEXO) (TSX: HEXO) is three times bigger than MedMen Enterprises (NASDAQOTH: MMNFF). Its stock is up big so far in 2019 while MedMen's shares are down year to date. And HEXO is more visible to U.S. investors with its stock listed on the NYSE American stock exchange, while MedMen is available only over the counter in the U.S.

When it comes to the future prospects for each of these stocks, all of this means... very little. Here's what's really important in deciding whether HEXO or MedMen is the better marijuana stock.

Marijuana leaf on top of a $100 bill

Image source: Getty Images.

The case for HEXO

Based on average trading volume, HEXO ranks as the No. 4 most popular marijuana stock on the market right now. There are several reasons behind HEXO's popularity among investors.

HEXO reigns as the market leader in the adult-use recreational marijuana market in Quebec, Canada's second most populated province. This market dominance stems from the company's huge long-term supply agreement with Quebec signed last year.

Although limited production capacity hampered HEXO's sales growth in the last quarter, that shouldn't be a problem for too much longer. HEXO's acquisition of Newstrike Brands, combined with the company's internal expansion efforts, should boost annual production capacity to around 150,000 kilograms in the not-too-distant future. 

That additional capacity could be needed as HEXO prepares for the launch of the Canadian market for cannabis edibles and other derivative products. Last year, giant beer maker Molson Coors Brewing selected HEXO to form a joint venture targeting this market. HEXO plans to launch a variety of products later this year, including cannabis-infused beverages, gummies, and vapes.

HEXO could soon partner with other major companies that operate outside the cannabis industry. CEO Sebastien St.-Louis stated in HEXO's recent quarterly conference call that HEXO is in discussions with more than 60 large companies about potential partnership deals. He expects HEXO to announce its second big partner later this year with another deal potentially on the way in late 2020.

There are also a couple of other noteworthy developments for HEXO that investors can look forward to next year. The company expects to be profitable in 2020. It also plans to enter the U.S. hemp CBD market in partnership with a large U.S.-based company next year.  

The case for MedMen

While HEXO is really popular with investors, Wall Street analysts think that MedMen has much greater upside potential. The average analysts' one-year price target for the cannabis retailer represents a premium of around 160% above MedMen's current share price.

There's a lot for investors to like about MedMen. The company currently operates 37 cannabis retail stores, with a 7% market share in the biggest prize of all: California. In total, MedMen owns 86 cannabis retail licenses, including some that it will pick up from pending acquisitions. This ranks MedMen at No. 2 nationally based on its number of retail licenses.  

As an early entrant in several core markets, MedMen has been able to secure prime real estate. With many states restricting the number of cannabis retail licenses, the company will face limited competition. 

Roughly 86% of the U.S. cannabis market isn't penetrated yet. This gives MedMen a huge growth opportunity. The company thinks that it can replicate its successful strategy adopted to become the retail leader in California in other states.  

But MedMen isn't focused only on the U.S. market. The company teamed up with Cronos Group to launch cannabis retail stores in Canada. The provinces in the country have been slow to finalize regulations for allowing retail stores to open, but Canada should be a big market for MedMen down the road.

MedMen isn't likely to be profitable anytime soon. However, that's mainly because the company continues to reinvest heavily in expansion. When it completes its "land grab" phase, though, MedMen could be in a great position to generate solid profits.

Better marijuana stock

I wouldn't discount the possibility that MedMen will emerge as a big winner in the cannabis retail industry. However, for now, I think that HEXO is the better pick.

My view is that HEXO is positioned to be one of the top players in the Canadian cannabis-infused beverages market. I think that the company is likely to land additional major partners that will help it enter the U.S. hemp CBD market. And my hunch is that HEXO will be able to increase its market share outside of Quebec as its capacity grows. 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.