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Hexo Stock Is Almost Worth Buying Now

Todd Shriber

This year, life has come at Hexo (NYSE:HEXO) stock fast. After opening the year around $3 a share, the Canadian cannabis company doubled by early February and by early May, the shares resided over $8. Since then, HEXO stock has been drubbed.

Hexo Stock Is Almost Worth Buying Now

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After hitting a 52-week high of $8.40 in early May, HEXO stock was cut in half, tumbling to around $4 before surging 10% last week to close around $4.40. The cannabis company, like several of its rivals, has found itself mired in controversy in recent weeks.

Last month, the company said that co-founder, Adam Miron is stepping away from his role as chief branding officer, but HEXO looked to assuage skittish investors by saying Miron will stay on as a “key” member of the board of directors.

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“Building HEXO has been one of the greatest privileges of my life,” said Miron in a statement. “I am a builder. What I see today is an established company with amazing leadership across all functions. I would like to thank the entire team and all our supporters for making this possible.”

That’s a lot of public relations speak right there and investors saw through it, sending HEXO stock tumbling on the news. Aside from the executive shuffling, HEXO stock faces another hurdle: even with the recent swoon, it’s not cheap. At almost 34x earnings, it’s actually expensive. Remember, HEXO is a small-cap stock and small caps are usually pricier than large caps, but at 34x earnings, HEXO stock is richly valued relative to the small-cap Russell 2000 Index, which has a price-to-earnings ratio of 16.74x.

Looking For Good News

Bank of America Merrill Lynch analyst Christopher Carey “expects an underdeveloped supply chain will continue to crimp Canadian cannabis companies, and while the market appears to be bracing for that, his estimates for 2019 and 2020 are still below consensus,” reports Barron’s. “Yet he still thinks in this environment that his Buy-rated stocks can outperform.”

Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC) and yes, HEXO, are the name that analyst likes in the cannabis space. Additionally, some active managers like HEXO stock. As I’ve noted several times this year, the universe of U.S.-listed cannabis exchange-traded funds has swelled from one at the start of the year to five at the end of July.

Three of the four new cannabis ETFs are actively managed funds, meaning there is a manager with discretion over the fund’s holdings and that the fund is not beholden to an index’s components. All three of those active marijuana ETFs own shares of HEXO stock. Given that two of those funds debuted last month, the managers likely got good pricing on HEXO as the stock was punished in July.

While those funds are not excessively allocated to HEXO stock, managers’ allocations to the name indicate the stock has some fans in the “smart money” crowd.

Bottom Line on HEXO Stock

Over the near-term, HEXO needs to steer clear of controversy and deal with rumblings from the short seller The Friendly Bear that asserts HEXO is headed for similar problems to CannTrust Holdings Inc., which saw its shares drubbed after running afoul of regulators.

The Friendly Bear claims HEXO could draw the ire of Canadian regulators because of its social media ads may be consumed by minors. HEXO denies that and investors have dealt with the accusations with aplomb, mostly, over the past few days. Still, between the debate with a short seller and the frothy valuations, HEXO stock can come in a bit more before investors need to take the bait.

As of this writing, Todd Shriber did not own a position in any of the aforementioned securities.

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