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Hexo, Brinks Company, Zoom Video and Crowdstrike highlighted as Zacks Bull and Bear of the Day

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Zacks Equity Research
·11 min read
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For Immediate Release

Chicago, IL – June 3, 2020 – Zacks Equity Research Shares of Hexo Corp HEXO as the Bull of the Day, Brinks Company BCO asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Zoom Video ZM and Crowdstrike CRWD.

Here is a synopsis of all four stocks:

Bull of the Day:

Today’s Bull of the Day starts with a disclaimer. I own this stock in the Marijuana Innovators portfolio.

I own it because it’s a very inexpensive way to play the potential market for cannabis derivative products – also sometimes referred to as “Cannabis 2.0” in Canada where these products are fully legal for recreational sales. Hexo Corp is a Zacks Rank #1 (Strong Buy) company that has formed a joint venture with brewing giant Molson Coors to produce cannabis-infused beverages for the recreational market.

Hexo trades at just $0.65/share. That’s not your typical Zacks Bull of the Day, but there are some powerful reasons why this could be a good speculative bet for a risk-friendly investor.

The Partnership

Hexo’s deal with Molson Coors was originally intended to produce mostly THC beverages in Canada – and potentially also in the US when they become legal here. Though the pace of US legalization efforts so far have been frustratingly slow for cannabis investors, Hexo and Molson Coors are adapting in a positive way.

They jointly own the independently-managed company “Truss” in Colorado and intend to produce CBD-infused beverages for the health and wellness market that will be sold in the US and also in Canada.

Cannabidiol (CBD) is a component of marijuana that’s completely legal in the US because it’s not psychoactive. Proponents believe that it has wide-ranging health benefits including relief from pain and inflammation, to reduction of anxiety and depression, improved recovery time from workouts and injuries and a host of other benefits.

There’s even some evidence that it’s helpful for conditions as various as PTSD, Acne, Arthritis, High Blood Pressure and Alzheimer’s.

CBD also appears to produce only mild side effects along the lines of fatigue and increased appetite. With no intoxicating effects, it has enormous appeal for everyone from healthy young athletes to infirm elderly people – and almost everyone in between. For obvious reasons, beverages are a popular way for consumers to ingest CBD.

Molson already has distribution and retail relationships that make getting CBD beverages to market much easier than it would be for a new company. It’s a powerful collaboration.
Having those relationships intact would also theoretically allow the company or an affiliate to sell THC beverages through the same channels when and if they become legal in the US.

“De-listing” Rumors

Because Hexo has been trading at a share price of less than $1, there have been rumors that it was likely to be de-listed from the New York Stock Exchange. Those rumors have held the share price down.

These fears are also overblown.

First, the NYSE has extended an exemption from the rules about de-listing because of the recent selloff due to the Covid-19 selloff. The listing rules are exchange regulations rather than federal securities laws and the exchanges have significant discretion in how to enforce them.

Also, while share price is one of the conditions for NYSE listings, market capitalization is actually a much more important factor. The forces of supply and demand determine the total value of a company, while the price per share is a factor of how meant shares are outstanding – something that’s in the control of the company itself.

The NYSE threshold is a 30-day average market capitalization of $50 million. Hexo currently has a market cap of $281 million. They could perform a reverse split of 2:1 or even 5:1 and be comfortably within the share-price requirement.

The Wildcard

While marijuana-related legislation has largely stalled in the US Congress – mostly because of much more pressing concerns – there’s a chance that significant progress toward legalization will be contained in the next round of Covid-19 relief legislation. The Democratically controlled House of Representatives included significant aspects of the SAFE Banking Act in their follow-up bill, informally referred to as CARES 2.0.

Though that bill was considered a non-starter in the Senate, the fact that it even included marijuana provisions at all is a positive sign for the industry.

The SAFE Banking Act would allow US financial institutions to do banking and lending business with marijuana companies without fear of penalty. It’s not legalization per se, but passage would give cannabis firms a big shot in the arm.

The Takeaway

Though stocks with a share price under $1 – sometimes referred to as “penny stocks” – aren’t generally standard fare for the Zacks Bull of the Day, investors with a healthy tolerance for risk should take a look at Hexo Corp as a way to get some exposure to the market for CBD beverages as well as a longshot bet on marijuana legalization at a very low price per share.

Bear of the Day:

Just like today’s Bull of the Day – Hexo Corp – the Bear of the Day was a component of the Marijuana Innovators portfolio. This one is not anymore. In fact, it was a huge disappointment.

I originally added the Brinks Company to the portfolio because I thought they were about to become a dominant player in the transportation industry for marijuana products and the cash that retail sales generate.

It seemed like a perfect fit – an industry that was forced to operate in cash because of a web of archaic regulations and a company that could use their existing resources to reduce the inefficiency that those rules inflict.

Brinks was already collecting significant revenues transporting cash and cannabis products in Canada and CEO Douglas Pertz even called the marijuana industry a “beautiful opportunity.”  I thought I was reading between the lines in thinking that Brinks was about to enter the business in a big way in the US.

I predicted that Brinks would use their scale to gobble up huge market share in the business so that even when marijuana becomes legal nationally and the industry no longer had to handle large amounts of cash, they’d have established relationships and would simply transport less cash but more product.

Less cash, but a lot more product would equal steady or increasing revenues – that was my logic.
I was totally wrong.

At the time, Brinks was declining to service the industry in the US even in states with full legalization. I figured that was about to change, but it turns out that they remain unwilling to take any business from marijuana companies unless the products are made legal at the federal level.
I obviously don’t know what advice Brink’s got from their legal counsel, but plenty of large public companies deal directly with marijuana companies in states where it is legal with no apparent repercussions.

Brinks has given smaller competitors time to gain a foothold in the market, so that even when federal legalization happens, they’ll have a much harder time signing up customers.

The best growth companies constantly push the boundaries. They’re willing to take risks and butt up right against regulations (especially silly ones) at the exclusion of more conservative competition. Those who are willing to do what others aren’t generally enjoy higher margins because of the reduced competition.

It turns out Brinks is one of the conservative ones - and not in a positive way.

I think they could also soon be seeing big problems with their core (non-cannabis) businesses. Cash transactions are an exclusively in-person activity. Think about all the places that do business in cash and require the services of armed transport. Restaurants, bars, casinos, race tracks, retail shops, salons, etc.

They’re all closed. That means they’re not transporting cash and they don’t need armored transport.

Not surprisingly, earnings estimates for Brinks are falling like a rock. Over the past 60 days, the Zacks Consensus Estimate for the current quarter has dropped from $0.95/share to just $0.06. Q3 has fallen from $1.20 to $0.38 and the full year estimate is down more than 50% - from $4.40/share to $1.81/share.

Large downward revisions like that earn Brinks Company a Zacks Rank #5 (Strong Sell).  Some of the expected shortfall in revenues and earnings is due to the Covid-19 related shutdowns and a steep falloff in cash transactions. That’s not necessarily their fault, but it still hurts. Another source of pain is the fact that they lost the opportunity to at least partially patch that hole by taking a more aggressive position on servicing the cannabis industry and they failed.

Additional content:

Markets Stay Optimistic, Zoom (ZM) & Crowdstrike (CRWD) Beat Estimates

Stock market indexes continue to shrug off tension and turmoil, leading ever-closer back toward the all-time highs we saw back in February of this year, prior to the coronavirus lockdown which purposely shut the U.S. economy for roughly 10 weeks. Even sinking new auto sales for May couldn’t dampen the mood, as results overall in the industry showed bigger gains than expected, to 12.17 million units sold in the quarter.

All 11 major sectors closed higher today — though likely more a function of a lack of fresh news items or economic reads to absorb. The Dow wound up finishing +267 points today, with the Nasdaq +56 and the S&P 500 +25. A reopening economy and agreeable weather in many parts of the country are helping give a boost to animal spirits in the market.

Speaking of market exuberance, the veritable lottery winner of the coronavirus era, Zoom Video, blew the doors off expectations for its fiscal Q1 earnings report after the bell Tuesday. Earnings of 20 cents per share doubled the 10 cents per share in the Zacks consensus, and rose 667% from earnings posted in the year-ago quarter. Revenues also whalloped estimates, with $328.2 million well-outpacing the $203 million analysts were looking for.

Guidance for next quarter, quite simply, went into another orbit: a range of 44-46 cents per share is now expected for Q2, 4x times higher that previously anticipated, on $495-500 million is quarterly sales that more than doubled the early projection of $222 million for Q2. Growth in customers with 10+ employees raced ahead 350% year over year, with its highest-paying customers up 90% from the year-ago quarter.

Clearly, Zoom does not expect the “work from home” environment to dry up anytime soon. Zoom shares have already gone up more than 200% year-to-date, and have tacked on another 4% in late-trading following the earnings results. Prior to the release, ZM had a Zacks Rank #3 (Hold) with a Value-Growth-Momentum score of D.

Silicon Valley-based Crowdstrike, a cybersecurity tech company, joined in with good news after regular trading Tuesday, swinging to positive $0.02 earnings (-$0.06 per share was expected) on $178.1 million in the quarter (up from the $165.9 million analysts were looking for). Subscriber growth came in 77%, better than the 72% posted a year ago. Guidance for next quarter also improves from Zacks consensus estimates: -$0.02 to $0.00 per share on $185.8 - 190.3 million. Shares have jumped over 6% upon the report.

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