While it’s not the best-known of the pot stocks, Hexo (NYSEAMERICAN:HEXO) is starting to build its reputation. Between fantastic year-to-date performance, a recent uplisting to a major U.S. stock exchange, and a shrewd merger, things are looking up for Hexo stock. There’s also a promising venture with MolsonCoors (NYSE:TAP) that gives Hexo credibility and helps elevate it to the big leagues within the pot stock universe.
Unfortunately, shareholders buying into the story today may be getting in a little late. The stock is up to more than $6 in just a few months. That, along with dilution from its recent merger has inflated Hexo’s market cap a great deal. The company now has a lot to prove in order to justify its stock price.
Hexo Has Huge Ambitions
A lot of marijuana companies are talking a big game about their future plans. More than a couple of the bigger companies seem intent on building global empires. Even by those standards, however, Hexo is shooting for the moon.
On the company’s most recent earnings conference call, CEO Sebastien St. Louis stated, “Our vision has remained consistent to create a branded consistent on and off cannabis experience across a variety of verticals in a variety of experiences ranging from sleep, to sport, to sex, to diet, to fun.”
Hexo isn’t just aiming to sell marijuana, it wants to change everything ranging from sex to athletics and nutrition. Heady stuff.
Furthermore, Hexo either sees the pot market becoming huge. Or perhaps it is planning on a variety of non cannabis things as well. To those ends, St. Louis said, “We intend to become the premiere branded ingredients for food companies not only a top two in Canada, but also top three globally.”
For comparison’s sake, a U.S. leader in the ingredients for food space, Ingredion (NYSE:INGR) has both a market cap and annual sales of around $6 billion. Hexo, by contrast, has a market cap of under $2 billion and sold just ~$10 million of product last quarter. If Hexo can reach the size of a company like Ingredion, it’d be a home run for shareholders. But it has a long way to go to reach that aim.
Can Hexo Live up to the Hype?
Hexo stock is having a fantastic year. As of this writing, the stock is up 101% year to date. That’s incredible on its own. It’s even more impressive when you consider that most of the other leading marijuana stocks have been in a bit of a slump lately.
We have to ask if Hexo will be able to maintain its hot streak though. As our Vince Martin recently wrote, much of Hexo’s recent gains have come from investors discovering the stock, rather than the company’s actual accomplishments.
“The story behind Hexo is gaining a broader reach — and the Hexo stock price is responding in kind. The question at this point is whether that’s a good thing — and whether a strong YTD is starting to price in at least some of the opportunity here, “Martin wrote.
Martin went on to explain how trading volume in HEXO stock has surged. In particular, with the company’s up-listing to a major market in the U.S., it has attracted far more activity. But the company will now need to demonstrate that it can live up to its greatly increased share price.
Newstrike Deal Looks Like a Positive
One positive for Hexo, as compared to other marijuana companies, is that it acquired Newstrike Brands (OTCMKTS:NWKRF). Hexo appears to have gotten a great deal, as it paid just a few percent premium to Newstrike’s then stock price.
Newstrike removes one key limitation for Hexo. Remember that Hexo is based in Quebec and has taken a big lead in French-speaking Canada. However Quebec makes up just 8 million out of Canada’s 37 million person population. Newcastle, with its business relationships in English-speaking provinces gives Hexo a major boost in becoming a national rather than just regional player.
Additionally, as of Newcastle’s latest filing, that company had a large cash position and few liabilities. Combine with Hexo, which recently raised money of its own, and the combined firm will have a great balance sheet with which to pursue further growth opportunities.
Hexo Stock Verdict
Hexo has built itself a bit of a differentiated business model from many of the other large Canadian marijuana rivals. Its focus on both edibles and beverages via the MolsonCoors relationship should give it some cover from steadily sinking marijuana prices in the Canadian recreational marijuana market. And if the company’s ambitions come anywhere close to playing out, Hexo stock should be a big winner.
On top of that, the company’s balance sheet and Newstrike deal should give it a lot of positive momentum through the rest of 2019. The company is looking at going from a revenue run rate that is currently around $40 million to something like four times that next year. Hexo should have some solid earnings releases coming in future quarters.
While the company’s story is promising, make sure you are comfortable with the risk before buying into Hexo stock at this price. It wouldn’t surprise me at all if the stock dipped 20-30% in coming weeks, particularly if the general malaise in the pot stock sector continues.
At the time of this writing, Ian Bezek owned TAP and INGR stock. You can reach him on Twitter at @irbezek.
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