Hexo Corp: HEXO Stock Could Be Ready for the Next Big Surge

HEXO Corp: HEXO Stock Could Be Ready for the Next Big Surge
iStock.com/Darren415

A Top Marijuana Stock to Think About

In this day and age, investment opportunities rarely get better than a fast-growing marijuana company flying under the radar.

After all, the most well-known pot stocks have already shot through the roof and command huge market capitalizations relative to the size of their current business.

I’m sure some of them will live up to investors’ expectations, but not every marijuana company will turn out to be a future winner.

And because of the well-known status of big pot companies, any sign of slowdown could trigger a downturn in their stock prices.

Advertisement

That’s why today I want to talk to you about a lesser-known name in the cannabis industry, Hexo Corp (NYSEAMERICAN:HEXO, TSE:HEXO).

Hexo Corp is a cannabis producer headquartered in Gatineau, Quebec, Canada. Like many Canadian pot companies, HEXO stock is listed on the Toronto Stock Exchange (TSE). But since January 23, 2019, it also started trading on the New York Stock Exchange (NYSE).

Of course, compared to the big-name marijuana companies trading on the major exchanges, Hexo Corp doesn’t get nearly as much attention in the financial media.

And that’s exactly why I’m digging it. Despite being a relatively small player in the industry, this company has been churning out growth rates that would make even the biggest players feel jealous.

Hexo Corp Is Firing on All Cylinders

In the second quarter of Hexo Corp’s fiscal-year 2019, which ended January 31, the company generated CA$16.2 million in gross revenue. Considering that Hexo’s gross revenue totaled CA$1.182 million in the second quarter of its fiscal 2018, its latest top-line result represented a staggering 1,269% increase year-over-year. (Source: “HEXO reports over $16.2 million in total gross revenue in the second quarter of fiscal 2019,” GlobeNewswire, March 14, 2019.)

And while the company is yet to have a positive bottom-line number, it’s moving toward that direction. For the quarter, Hexo Corp had a net loss of CA$4.33 million, substantially narrower than its CA$8.95-million net loss in the year-ago period.

At this point, I want to point out that Hexo Corp is not bulletproof. Like many of its peers, HEXO stock tumbled during the market sell-off in the fourth quarter of 2018.

However, the blunt reality is that no matter what the bears say, they cannot deny the fact that Hexo is selling a lot more cannabis than before, at a higher price than before. And that’s a recipe for success for a marijuana producer.

Consider this: in the first quarter of Hexo’s fiscal 2019, the company sold 952 kilograms (2,099 pounds) of dried cannabis at an average selling price of CA$5.45 per gram.

In the second fiscal quarter, the company sold 2,537 kilograms (5,593 pounds) of dried cannabis at an average selling price of CA$5.83 per gram. That’s a 174% increase in volume and a seven-percent increase in price.

Worth noting is that, while HEXO stock is one of the lesser-known marijuana stocks, it has built an entrenched position in its operating markets.

For instance, the company has secured a five-year supply agreement with the Société québécoise du cannabis (SDQC), a Crown corporation that’s responsible for the trade of recreational cannabis in the province of Quebec.

Under the agreement, Hexo is expected to supply 20,000 kilograms (44,092 pounds) of cannabis in the first year after legalization.

Based on the projected growth rates of the marijuana market, Hexo is expected to deliver 54,450 kilograms (120,041 pounds) of cannabis by the fifth year, bringing the total volume to be supplied to more than 203,950 kilograms (449,633 pounds) over the five-year term of the agreement. (Source: “Hydropothecary signs 5-year preferred supplier agreement with SAQ, for an estimated volume of 200,000kg,” GlobeNewswire, April 11, 2018.)

On the financial front, the supply agreement could add CA$1.0 billion to Hexo’s revenue during the five-year term.

As a matter of fact, the company’s agreement with SDQC marked the largest forward contract in the history of Canada’s cannabis industry based on first-year volume. And in the first three years, the contract is expected to give Hexo Corp more than 30% market share in the province of Quebec. (Source: “Corporate Presentation,” Hexo Corp, last accessed May 2, 2019.)

HEXO Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Ultimately, a business as solid as Hexo Corp cannot go unnoticed forever. HEXO stock has already climbed out of the doldrums and trades at $7.45 apiece at the time of this writing. Once more investors realize the potential of this marijuana company, HEXO shares could get a lot more expensive.