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Cannabis Stock HEXO to Benefit from Sector Chaos

support@smarteranalyst.com (Ben Mahaney)

With some of the chaos in the Canadian cannabis sector, HEXO (HEXO) stands to benefit due to reasonable growth plans. The uplisting to the NYSE will provide just the catalyst for the stock to gain further visibility in a crowded sector right when standing out should derive the most benefit.

Industry Chaos

In the span of a week or so, Canopy Growth (CGC) fired its founding CEO and CannTrust (CTST) reported a failed Health Canada audit. The combination suggests some of the flood of dried cannabis set to hit the market in 2019 will not occur.

First, Canopy reported an adjusted EBITDA loss for the March quarter and the firing right after the end of the June quarter suggests another bad quarter are in the cards. The implications of his firing are that Constellation Brands (STZ) doesn’t want the largest company in the industry to aggressively build up production capabilities at the cost of margins. One should expect announcements in the next few months that reign in production growth.

Second, CannTrust jumped the gun on growing cannabis in five rooms that Health Canada approved in April 2019. The company has 12,700 kg of dried cannabis held for further inspection due to growing in unlicensed rooms. In addition, some cannabis oil in Denmark has popped up as sourced from the unlicensed batches. CannTrust had plans for 75,000 kg of outdoor cannabis this year that isn’t going to hit the market now.

The impact is that HEXO has two competitors that aren’t as aggressive anymore.

Ramifications for HEXO

HEXO has sold off to $5 following a weak quarterly report, but the company remains on track to reach C$400 million in FY20 sales that ends next June. Having both Canopy Growth and CannTrust in chaos helps the pricing power that HEXO needs to reach this aggressive revenue target.

With the acquisition of Newstrike Brands, HEXO is ramping up annual production capacity to 150,000 kg. HEXO only harvested 9,804 grams in the last quarter still leaving them to more than triple quarterly supply.

A big key here is the company isn’t cutting corners to reach very aggressive production targets like CannTrust. The additional entry into CBD extraction from 200,000 kg of hemp supply in 2020 positions them to enter the U.S. market in a strong way to balance Canadian growth.

All while, the stock is uplisting from the NYSE American exchange to the NYSE. While moving to the NYSE American and obtaining an official four-letter stock symbol helped the stock reach new highs, the NYSE will provide much higher visibility for the stock.

Takeaway

The key investor takeaway is that HEXO is trading at the lows as the cannabis sector stocks are pulled down into the dumps from some of the bad press from competitors. The logical thought process from investors should be that some of the aggressive growth plans from competitors will get reined in by the market.

The best way to play this transition in the industry is to invest with companies like HEXO that aren’t impacted. The company has the ability to grab more market share while facing less pricing pressure making for a good stock pick at the lows.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

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