Hexo Stock Has Profit Potential That Just Can’t Be Ignored

Will Healy - finance.yahoo.com Posted 5 years ago
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Hexo (NYSEAmerican:HEXO) continues to gain more attention among traders. Its position in Quebec, a major buyout, and an alliance with a key beverage firm provide a solid base that bolsters Hexo stock.

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A low valuation compared to its peers also makes it attractive. Despite its relatively small size, HEXO delivers the key attributes needed to add shareholder value. I like budding companies in an industry, and I think among Canadian marijuana equities there aren’t many better than Hexo.

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Hexo benefits from a preferred supplier status in the Canadian province of Quebec. Thanks to this status, they control around 50% of the recreational market in that province. With a population of about 8.4 million, it comprises an estimated 25% of Canada’s adult population. Bolstered by this base, it has expanded across Canada and abroad.

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The firm also announced a buyout of Newstrike Brands for an all-stock deal valued at $263 million. This will add 1.8 million square feet of cultivation space to Hexo’s existing 579,000 square feet.

With a market cap of only $1.6 billion, this will not place Hexo stock on par with Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). Still, it brings Hexo much closer to its top peers in terms of production.

Analysts and Hexo Stock

It also has appeared to surpass the company I saw as another up-and-comer, CannTrust Holdings (NYSE:CTST). Over the last few weeks, CTST stock has taken a beating. However, Hexo seemingly escaped the same downward trend when a Bank of America (NYSE:BAC) analyst initiated coverage with a $10 per share price target.

I think it will get there.

It recently traded as high as $8.40 per share, and it holds at around $7.70 per share as of the time of this writing. Moreover, considering the valuations of this industry today, Hexo looks like a bargain. The stock trades at a forward price-to-earnings (PE) ratio of around 57.  Also, analysts widely expect the company to achieve a profit next year.

Alliances and Valuation

Furthermore, like firms such as Canopy Growth, Cronos Group (NASDAQ:CRON), and Tilray (NASDAQ:TLRY), Hexo stock has also attracted interest from a large, U.S.-based investor. In this case, that partner is Molson Coors Brewing (NYSE:TAP).

My InvestorPlace colleague Josh Enomoto had an interesting take on this alliance. It holds a distinct advantage over the Cronos deal with Altria (NYSE:MO). While many will never accept cannabis in a smokable form, they might embrace it through cannabidiol (CBD)-infused beverages. Hence, it holds more potential to achieve a level of acceptance in an area where Cronos and others will struggle.

I think all of these attributes mean one of two things for Hexo.

First, as I mentioned earlier, investors could one day consider Hexo one of the top cannabis companies in Canada. Secondly, I see a strong case for a buyout. Aside from its other benefits, it trades at a comparatively low PE ratio. I do not advocate buying specific equities in hopes of a buyout. However, that prospect affirms the qualities that make HEXO one of the better cannabis stocks to own.

The Bottom Line on Hexo Stock

Although Hexo remains one of the smaller weed companies in Canada, it could potentially become one of the top cannabis stocks to add shareholder value. Despite a much lower market cap, a stable business bolsters Hexo. Further, it dominates the non-pharma market in Canada’s second-largest province.

A deal with Molson Coors as well its purchase of a company which will vastly increase its production capacity add to Hexo’s credibility.

These attributes give traders a huge incentive to consider Hexo over larger firms. Moreover, its relatively low multiple gives Hexo stock one of the more attractive valuations among its major peers.

This lower PE ratio should attract investors and possibly buyout offers. Hence, those who missed the rise of cannabis stocks such as Canopy Growth or Tilray may see Hexo stock as their second chance.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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