Looking to Buy HEXO? Here Are 5 Things You Should Know About the Marijuana Stock First
HEXO Corp. (NYSEMKT: HEXO) took investors on a roller-coaster ride in 2018. The marijuana stock more than doubled by October, but gave up most of its gains to end the year up by only 5%. HEXO is off to a great start in 2019, though, with shares soaring 78% so far.
Despite its nice run in 2019, HEXO's market cap is still only a little over $1 billion -- well below the steep market caps of several of its peers. But if you're looking to buy HEXO, there are five things you should know about the marijuana stock first.
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1. Ample production capacity
Since the Canadian recreational-marijuana market opened in October 2018, marijuana producers have been scrambling to meet the skyrocketing demand. Companies can sell all the product they can deliver. The problem for many marijuana growers, though, has been that they simply don't have enough production capacity.
HEXO appears to be in pretty good shape on this front. The company has a new 1 million square-foot production facility. It's ramping up production to an annualized run rate of 108,000 kilograms. HEXO also recently announced plans to acquire Newstrike Brands in a deal that will boost its annual production capacity to 150,000 kilograms.
2. A commanding presence in Quebec
Quebec is Canada's second-largest province with a population of more than 8 million. And HEXO is in the driver's seat in the province's recreational-marijuana market, thanks to a major multiyear supply deal signed last year. The company's market share in Quebec is at least 30%.
However, HEXO isn't just setting its eyes on the market in Quebec. The company has retail distribution agreements in place in nearly all of Canada's provinces and territories. HEXO currently has 30 products available for the adult-use recreational marijuana market in the country.
3. A major partnership
Cannabis beverages and edibles can't be sold in Canada yet, but that should change later this year after regulations are finalized. HEXO should be in a great position to hit the ground running as a result of its partnership with Molson Coors (NYSE: TAP).
In August 2018, Molson Coors and HEXO announced that they were forming a joint venture to develop cannabis-infused beverages. Although Molson Coors didn't make a big investment in HEXO like Constellation Brands did with Canopy Growth and Altria did with Cronos Group, the big beer company received warrants to purchase shares of HEXO as part of their deal.
4. A later start in international markets
Sooner or later, supply will catch up with demand in the Canadian marijuana market. That's why international opportunities are important for HEXO's long-term growth.
The bad news is that the company isn't nearly as far along in establishing international operations as several of its larger rivals. The good news is that HEXO announced a joint venture with Greek medical-cannabis company Qannabos in September 2018. This joint venture is constructing a production facility for shipping medical cannabis to European markets. HEXO's joint venture with Molson Coors also plans to distribute consumer products to international markets.
5. More dilution could be on the way
In January, HEXO sold more than 8.8 million shares to raise additional capital. The company isn't profitable yet, so it's possible -- if not probable -- that there could be more stock offerings down the road. The problem, of course, is that every new share issued dilutes the value of existing shares.
It should be noted, though, that HEXO has another way to fund operations and expansion efforts. The company entered into a syndicated credit facility with Canadian Imperial Bank of Commerce and Bank of Montreal in February. This arrangement allows HEXO to borrow up to 65 million in Canadian dollars (around $49 million).
Consider your time horizon
Investors should consider their time horizon before buying HEXO (and probably any other marijuana stock.) Over the short term, there could be significant volatility. Over the long run, though, the growth potential for solid marijuana businesses should be quite good. HEXO arguably belongs in that group of solid contenders, especially with its relationship with Molson Coors.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Constellation Brands and HEXO. The Motley Fool has a disclosure policy.
