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The Molson Coors Deal Will Be a Game Changer for HEXO Stock

Tom Taulli

For the cannabis sector, there has been a grueling bear market since April or so. Even the tier-one companies have suffered major double-digit declines, such as Canopy Growth (NYSE:CGC), Cronos Group (NASDAQ:CRON) and Tilray (NASDAQ:TLRY).

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Then again, the run-up that came before the downtrend was parabolic as the sentiment got excessive. Let’s face it, there was too much optimism about the potential impact from the legalization of the Canadian market. It also did not help that there were problems with the supply chain as well as black market activity. So when things did not pan out as expected, a painful correction was inevitable.

But I do think this is presenting some interesting opportunities in the space. For example, take a look at Hexo (NYSE:HEXO) stock, which has been cut in half during the past six months.

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The company is certainly well positioned to benefit from the long-term potential in the Canadian market. Keep in mind that Hexo dominates the Quebec market, with a 30% share.

What’s more, the company continues to make strides with production. Hexo has aggressively expanded its footprint to about 1.8 million square feet, with annual production of 150,00 kilograms.

M&A has also been critical. To this end, Hexo shelled out $197 million for Newstrike Brands Ltd, which added to annual capacity by about 150,000 kilograms.

Yet the focus on production has not been about quantity over quality. Consider that the company has been a heavy investor in innovation and R&D, which has allowed for higher margin offerings.

According to Hexo CEO Sebastien St-Louis, on the latest earnings call: “We now have 25 PhDs on staff. They’re focused on developing new and innovative products for the market, best-in-class technology for our ‘Powered by HEXO’ experiences. Building on our innovative technology is critical in building brands.”

Strategic Alliance With Molson Coors Brewing

I think a critical factor for Hexo stock is its partnership with Molson Coors Brewing (NYSE:TAP). No doubt, there are the benefits of leverage from the broad capabilities of global distribution, marketing expertise and logistics. Such factors will likely prove essential in breaking through the noise in the marketplace.

The deal with TAP will also allow Hexo to benefit from the “Cannabis 2.0.” This refers to October 17th, when it will be legal to sell cannabis extracts in Canada (although the selling will not be allowed until mid-December because of the requirement to get a permit). The market is likely to be significant, with the potential for $1 billion+ in spending next year.

To prepare for this, Hexo and TAP have been jointly creating a variety of products, such as beverages, gummies and vapes. In other words, there could be a nice catalyst for revenue growth. For example, in regards to fiscal year 2020, Hexo is projecting that the top-line will hit a hefty $400 million and that there will be a doubling in fiscal Q4.

Bottom Line On The Hexo Stock Price

Given the consistent downtrend in Hexo stock, it’s understandable that investors want to back off. There are legitimate fears that this could be the proverbial “falling knife.”

Yet it really does look like the sentiment for Hexo stock has gotten to overly negative levels. Besides, the growth story looks intact, especially with Cannabis 2.0, and the company has strong production and a solid position in the Canadian market. So for investors with a long-term perspective, I think Hexo stock looks like an interesting play at current levels.

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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