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Is Hexo Stock a Must-Buy Cannabis Play?

Bret Kenwell

Shares of Hexo Corp (NASDAQ:HEXO) ripped higher by almost 10% on Monday, putting together a very important reversal. This surge helped keep Hexo stock above $4 on a closing basis, keeping support intact and possibly radioing in the bulls to go long.

Is Hexo Stock a Must-Buy Cannabis Play?

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Not a particularly well-known company with its $1.1 billion market capitalization, Hexo stock mostly flies under the radar. It’s also a relatively young company, incorporating in 2013 and going public in 2017. Initially, HEXO went public in Canada, but transferred its listing to the New York Stock Exchange in July.

Since reporting earnings in June, shares of the cannabis firm have struggled, falling from roughly $5.50 in mid-June to sub-$4 just this week. Let’s take a closer look at Hexo stock before going any further.

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How to Trade Hexo Stock

On Monday, July 29, the Hexo stock price dropped to $3.73 before reversing higher. Shares finished the day at $4.36, up almost 10% on the session and up approximately 17% from the lows that day. Talk about a change in fortune!

So, where does that leave HEXO now?

Shares held the pivotal $4 mark, which was resistance throughout 2018. Seeing this level turn to support is an important development. It keeps the bull case alive and suggests that perhaps sentiment is still okay.

chart of Hexo stock price

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The concern is that the rest of the cannabis space is losing steam. We were right on the money with Canopy Growth (NYSE:CGC) earlier this month. Cronos Group (NASDAQ:CRON), Aphria (NYSE:APHA) and Aurora Cannabis (NYSE:ACB) were also showing similar signs of weakness.

This is a volatile group that trades largely on momentum right now. When times are good, the stocks race higher. But when negative headwinds develop, these names can get hammered. Down almost 50% from its highs a few months ago, Hexo stock is no exception.

Investors in the name need to see if $4 holds. Should the Hexo stock price fall below this mark, investors would be prudent to use a close below $3.73 as their stop-loss. Shares do have a level of uptrend support (blue line) to shoot against too, so keep that in mind.

On the upside, we need to see Hexo stock push through channel resistance (purple line) and get above approximately $4.75. If it can, the 10-week moving average at $5.14 is the first target, and the 50-week moving average near $5.50 is the second. To reach the latter, HEXO must climb some 25% from current levels.

Bottom Line on HEXO

So, is Hexo stock a screaming buy?

I wouldn’t go that far. The reversal off $4 definitely puts it on the radar. And a slight pullback on Tuesday or Wednesday gives bulls a great risk/reward possibility. At the very least, the risk is defined because we now have levels to shoot against.

But I will never be able to call a speculative holding like Hexo Corp stock a “screaming buy.” That’s no offense to the company, its business or management. It’s just a young company in a young industry still finding its way.

Last quarter, sales increased 944% to $9.76 million, while the company lost 6 cents per share. A $1 billion valuation for a company doing about $10 million in quarterly sales is pretty wild. But that’s how things roll with cannabis stocks these days.

However, management says HEXO is “on track” to hit $400 million in sales in fiscal 2020. If it can, that may make the stock undervalued — at about three times sales — given the valuation of others in its group.

The company has $129.2 million in cash, while long-term debt stands at just $22.7 million. Total current liabilities of $35.4 million are dwarfed by the $198.9 million in total current assets. It’s a similar situation with total assets to total liabilities, with the former outweighing the latter at $381 million to just $58 million.

The balance sheet is strong and management’s outlook is bright. With an improving technical outlook, Hexo stock could warrant some attention.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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