Marijuana Penny Stocks Preparing for a Comeback?

Marijuana Penny Stocks Preparing for a Comeback
iStock.com/Shidlovski

Marijuana Penny Stock Rise

If you’ve been a frequent reader of my articles, you’ll know that I’ve long been bullish on two marijuana penny stocks in particular: Hexo Corp (NYSEAMERICAN:HEXO) and OrganiGram Holdings Inc (NASDAQ:OGI).

Investors who have been following my stock reporting since the beginning may have seen huge gains that doubled or even tripled their money. But lately, these marijuana penny stocks have had a tough time of it.

Chart courtesy of StockCharts.com 

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As can be seen in the above chart, year-to-date these two stocks have been very strong indeed. Both HEXO stock and OGI stock are up big in the first half of 2019. But it’s also impossible to miss that, since June, these stocks have taken a beating.

The main reason for this drop in share value is due to the overall stalling in the marijuana industry at large. Most stocks have fallen in that time. This is due to a marijuana correction that has been taking place as the initial Canadian recreational marijuana legalization and the U.S. cannabidiol legalization bumps have been wearing off.

Chart courtesy of StockCharts.com

Sure, things have been rather dismal for these two pot stocks recently, but I consider this an opportunity rather than a problem.

You see, marijuana corrections are part of the game. I’ve written about this before, but the long story short is that the industry typically goes through these boom and bust cycles, with gains almost always coming on the other side of these falls.

When it comes to marijuana penny stocks, they typically are hit harder by the swings due to their relative size. Bigger companies are better able to withstand the market’s uncertainty, while smaller companies are often harder hit. That’s just the nature of the beast when dealing with penny stocks of any industry, and it goes double for marijuana penny stocks.

Having said all that, however, I’m still firmly bullish on both Hexo Corp and OrganiGram Holdings Inc, as both have what it takes to turn these down periods into comebacks well before 2019 is done.

HEXO and OGI Stocks

As I said earlier, downturns can be opportunities if played correctly. As the tired adage goes, “buy low, sell high.”

This is very much a “buy low” period, with shares that were already undervalued (in my opinion) now hitting lows they haven’t seen in many months. This represents an opportunity to reinvest and be rewarded with major gains after the marijuana correction.

Both HEXO stock and OGI stock are undervalued in my estimation because they share a lot in common: a potent combination of strong fundamentals and relatively low valuations while still being major marijuana companies.

Hexo Corp and OrganiGram Holdings Inc are fifth and seventh in size by market cap, respectively. Both are very strong marijuana companies with large supply deals in place across Canada, and both have listings on major U.S. stock exchanges.

In Hexo’s case, the company has one of the strongest supply agreements out there with a long-term deal signed with Quebec, Canada’s second-most-populous province.

Both companies have also released very strong quarterly reports in the recent past, even if the last ones weren’t quite as positive as we’re used to seeing.

But when it comes to both HEXO stock and OGI stock, the real potential lies in the untapped markets.

In Canada, the rollout of marijuana legalization has been, let’s say, less than ideal. The black market is still thriving and the gray market makes it even more difficult for legitimate marijuana companies to succeed.

Consider Ontario, which is Canada’s most populous and richest province. Home to over 14 million people, it is only now set to get 50 more government-approved cannabis stores in October, a full year after the drug was legalized nationwide. The first 25 stores that were approved in Ontario, meanwhile, have yet to all become fully operational. (Source: “Ontario to issue 50 new cannabis store licences, eight to go to First Nations,” CP24, July 3, 2019.)

Consider this: right now, there is fewer than one store per 500,000 residents in the province. If even, let’s say, five percent of the Ontario population indulges in marijuana, we’re still looking at a whopping 25,000 people per store.

Not to mention that Ontario is a massive province geographically; there are simply too few stores to serve that huge of an area and population. While we expected some speed bumps as legalization came out, this is pretty rough a year out.

On the flip side, however, we have Canada finally getting its ducks in a row. As it figures out how to properly implement legalization and ensure that legal marijuana companies have a fighting chance to compete with the illicit pot trade, we’re going to see legal sales jump.

And much like sales jumped in early 2019, these numbers will be reflected in financial reports, which in turn will lead to massive share growth.

It’s inevitable, but it will take time, and it will take governments that get out of the way of the legitimate marijuana companies.

But back to marijuana penny stocks: when the rebound eventually comes as Canada figures things out, I anticipate huge growth among these smaller powerhouse stocks.

On the cusp between marijuana penny stocks and industry behemoths, both HEXO stock and OGI stock have a lot to look forward to, both in 2019 and beyond.

Analyst Take

While we wish we would see marijuana stocks only ever go up, that is simply not the way things work in the pot trade. Shares rise and shares fall, but at the end of the day, we almost always come out on the other side with gains.

When it comes to HEXO stock and OGI stock, both marijuana penny stocks have massive potential, even if the near term may present a few roadblocks.

Both companies are small enough to see huge gains but large enough to provide stability, while also sporting some of the best supply deals in the business.

Downturn or no, these are still two of my top pot stocks, and they could yield big gains down the line.