In the world of cannabis stocks, Hexo (NYSEAmerican:HEXO) isn’t as familiar to investors as, say, Canopy Growth (NYSE:CGC) is. But if HEXO continues to make smart moves, it won’t be long before Hexo stock is a crowd favorite.
Despite being under the radar, Hexo has captured the attention of Bank of America analyst Christopher Carey, who recently named HEXO stock his top pick in the cannabis space.
Carey has a “buy” rating and a $10 price target on HEXO stock, which closed yesterday at $7.82. He argues that its differentiated products, strong fundamentals, and innovation efforts should propel HEXO stock to double digits by this time next year.
Here’s why I think he’s on the money.
A Leader in Quebec
The Quebec market might be considered tiny compared to the Ontario market right next door, but the reality is that Quebec is one of Canada’s largest provinces. Hexo is estimated to have 50% of the recreational pot market in Quebec, giving it a virtual stranglehold on that market.
“Based on Health Canada data, we estimate HEXO captured ~11 per cent recreational market share between Nov. 2018 and Jan. 2019. This would position HEXO’s REC market share amongst the ranks of the industry’s largest producers such as Aurora and Aphria, despite supplying only three provinces during the quarter,” GMP Securities analyst Robert Fagan wrote in a March note to clients. “In addition, we estimate HEXO’s REC market share in Quebec at ~50 per cent over the same period, demonstrating strong execution for HEXO in its core market.”
At the same time that Fagan wrote this note to clients, he also raised his target price on HEXO by 20% to $10.50 while maintaining his “buy” rating on HEXO stock.
So two analysts like the company’s strength in Quebec and have given it a double-digit, 12-month price target.
No matter what Hexo does from here on out, it will likely always have a dominant position in Quebec, which should help make it consistently profitable, sooner rather than later.
The Newstrike Strike
In March, Newstrike Brands (OTCMKTS:NWKRF) agreed to Hexo’s $263 million all-stock acquisition offer. The combined companies’ total production capacity of 150,000 kilograms of cannabis annually will help Hexo meet its revenue goal of CAD$400 million by the end of fiscal 2020.
All of the cannabis producers have lofty revenue goals for the next two or three years. However, the acquisition of Newstrike, which sells cannabis in five different provinces including its home province of Ontario, has allowed Hexo to become more of a national player.
“Our strength in Ontario and English Canada clearly complements HEXO’s strong position in Quebec and creates an industry leader,” Newstrike chief executive Jay Wilgar said in a statement in March.
If HEXO captures a big chunk of Canada’s two biggest provinces, the CAD$400 million target could turn out to be conservative.
I wouldn’t bet your life savings on that happening, but Hexo CEO and co-founder Sebastien St-Louis is positioning Hexo to be one of Canada’s leaders in both recreational and medical marijuana.
If you own Newstrike stock, don’t sell the HEXO stock that you will get once the deal goes through.
The Bottom Line on Hexo Stock
Hexo is one of my three favorite pot stocks, along with Cronos Group (NASDAQ:CRON) and Canopy Growth.
Between Quebec and the Newstrike deal, HEXO has become a potent competitor in the Canadian market. While others are chasing the U.S. cannabis market, which is already much more significant than Canada’s pot market, it’s not a bad thing to be a big fish in a small pond. Controlling Quebec and parts of Ontario is a lucrative long-term proposition.
However, as many people have said, it is HEXO’s existing partnership with Molson Coors (NYSE:TAP) to produce CBD-infused drinks, along with potential future alliances, that has the gereatest potential to boost HEXO stock.
After cannabis edibles and CBD-infused drinks are legalized in Canada in October, the competition in the cannabis industry will heat up even further.
St-Louis, HEXO’s CEO, has already proven that he’s ready to take on all comers. HEXO stock might not be the best- known cannabis name, but its future continues to look bright.
$10, here we come.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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