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Is Hexo Stock a Falling Knife Or Has It Reached a Good Entry Point?

Tom Taulli

The recent market drop has certainly been brutal and quite broad.  But then again, this bear move is opening up interesting opportunities.

Just look at the cannabis space. In fact, the downturn of marijuana stocks preceded the recent decline of the overall markets, as various public cannabis companies had a tough time meeting investors’ lofty expectations.

In yesterday’s trading, Canopy Growth (NYSE:CGC) was, at one point, off 10.5% to $28.60 (the stock was over $50 a few months ago). That was after the stock had dropped 6.6% the day before. And on Wednesday,  Tilray (NASDAQ:TLRY) dove 15%.

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The declines were kind of scary. But when it comes to investing, going against the grain can mean getting strong returns.

One marijuana stock  that should get attention is Hexo (NYSE:HEXO). Since late April,  Hexo stock price has gone from $8.30 to $4.47.

But HEXO has a number of positive characteristics. First of all, HEXO has gotten validation from Molson Coors (NYSE:TAP), which has formed a partnership with the cannabis company. The focus of the deal is developing a line of cannabis-infused beverages that will hit the market on Dec. 16th ( when such drinks will be legalized in Canada).

All in all, the deal should provide Hexo stock with a nice catalyst. TAP will leverage its extensive marketing and logistical capabilities on behalf of HEXO’s products. TAP’s creative skills should help HEXO develop compelling products. The partnership really does look like a win-win.

This is what the CEO of Molson Coors of Canada, Frederic Landtmeters, had to say about the deal: “We look forward to partnering with HEXO, a recognized leader in the medical cannabis space in Canada that will bring robust production capacity, a track record of innovation, and, most importantly, shared values when it comes to doing business the right way and earning the trust of consumers.”

But ultimately this is about more than just Canada. Because of the U.S. Farm bill, Hexo will be able to launch CBD-based drinks in eight states next year.

Key Advantages

The TAP deal illustrates a main benefit of HEXO:  the company’s high production output.  Note that it has about 30% of the Quebec market.

Another critical factor is that HEXO acquired Newstrike Brands Ltd for $197 million. As a result of the deal, Hexo boosted its annual capacity by about 150,000 kilograms.

Now it’s true that Hexo stock is not without its issues. The company’s last earnings report was a major disappointment. It revenue came in at 13.02 million CAD, representing a quarter-over-quarter drop of about 9%. while the Street was looking for $14.8 million.

But the cannabis industry is still in the early stages, so choppy results are normal. Then again, the industry’s fundamentals remain bright. That is why companies like TAP, Altria (NYSE:MO) and Constellation Brands (NYSE:STZ) have invested billions in the category.

The Bottom Line on Hexo Stock

When it comes to the cannabis space, I think the key is to focus on the dominant players. Size will certainly be essential, given the competitive environment. And HEXO  looks well-positioned to perform well over the long-haul.

Yet the volatility of Hexo stock price will likely remain high. That is why it’s a good idea to take moderate positions – or dollar-cost average – to help mute the wide swings of HEXO stock.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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