This Could Spark the Next Rally in Hexo Corp (It’s Already Up 89% YTD)

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A Soaring Weed Stock with capacity and More Upside Ahead

If you need any convincing about the potential of the marijuana industry, here’s a number: 1,269%.

That’s how much HEXO Corp’s (NYSEAMERICAN:HEXO) gross revenue increased year-over-year in the company’s most recent quarter. (Source: “HEXO reports over $16.2 million in total gross revenue in the second quarter of fiscal 2019,” Globe Newswire, March 14, 2019.)

And Hexo Corp isn’t even one of the most well-known weed stocks.

Headquartered in Gatineau, Quebec, Canada, Hexo is a cannabis producer. To many U.S. investors, HEXO stock is a relatively new ticker. This is because the company was approved for listing on the NYSE American stock exchange just over two months ago.

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Prior to that, U.S. investors who wanted to own HEXO shares had to purchase them over the counter because the company was only listed on the Toronto Stock Exchange (TSE) back then.

Hexo Corp Stock Chart

Despite not being as famous as the big weed stocks trading on the NYSE or Nasdaq, Hexo Corp has delivered some serious returns to investors.

Year-to-date, shares of HEXO stock have climbed 89%.

Chart courtesy of StockCharts.com

Acquisition Strategy

Due to a recent strategic decision, the massive surge in HEXO stock’s price could just be the start.

On March 13, Hexo announced that it would acquire Newstrike Brands Ltd (OTCMKTS:NWKRF, CVE:HIP) in an all-share transaction valued at approximately $263.0 million. (Source: “HEXO Corp to acquire Newstrike Brands Ltd.,” Globe Newswire, March 13, 2019.)

Under the agreement, Newstrike shareholders will get $0.06332 of a HEXO common share for each Newstrike common share they own. The deal was unanimously approved by both companies’ boards of directors. Newstrike’s board also recommended that its shareholders vote in favor of the deal.

Now keep in mind that Hexo Corp is already an established player in the marijuana business. The company currently has more than 310,000 square feet of production capacity and has another one-million-square-foot facility under construction.

With the new acquisition, Hexo would have access to four more production campuses with close to 1.8 million square feet of near-term cultivation space.

Furthermore, buying Newstrike would help Hexo diversify its business and increase its market penetration. The combined company currently has distribution agreements in Ontario, Quebec, Alberta, British Columbia,  Manitoba, Saskatchewan, Nova Scotia, and Prince Edward Island.

“This is the most compelling combination we see in the Canadian cannabis sector,” said Newstrike’s Chief Executive Officer Jay Wilgar. “Our strength in Ontario and English Canada clearly complements HEXO’s strong position in Quebec and creates an industry leader.” (Source: Ibid.)

Keep in mind that Canada legalized recreational marijuana for adult use nationwide on October 17, 2018. With the combined company reaching eight of the 10 provinces in Canada, the deal would give Hexo Corp a platform that’s poised for future growth.

The best part is, the acquisition will likely give a big boost to the company’s financials.

Growing Financials

Now I should point out, as it stands, Hexo Corp has already been delivering some very impressive growth rates.

In the three months ended January 31, 2019—the second quarter of Hexo’s fiscal-year 2019—the company produced 4,938 kilograms (about 10,886 pounds) of dried cannabis, representing a 39% increase sequentially.

Moreover, Hexo sold 2,537 kilograms (about 5,593 pounds) of dried cannabis for adult use, marking a 166% increase quarter-over-quarter.

At the same time, the average selling price of dried cannabis for adult use was CA$5.83 per gram in the quarter, up seven percent from the prior quarter. (Source: “HEXO reports over $16.2 million in total gross revenue in the second quarter of fiscal 2019,” Globe Newswire, op cit.)

And the best could be yet to come. With the new acquisition, management expects Hexo to generate CA$479.0 million in gross revenue from the sale of cannabis in Canada in fiscal-year 2020.

Given Hexo’s current annual gross revenue run rate of CA$64.7 million, the projected top-line number for fiscal 2020 would mark another 640% increase.

Meanwhile, the deal will likely bring more efficiency to Hexo’s operations. Management projects that the combined company would achieve annual synergies of around CA$10.0 million. (Source: “HEXO Corp to acquire Newstrike Brands Ltd.,” Globe Newswire, op cit.)

For those still wondering whether a weed stock can one day be considered “mainstream,” here’s a fact: In August 2018, Molson Coors Brewing Co (NYSE:TAP) agreed to create a joint venture with Hexo to develop non-alcoholic, cannabis-infused beverages for the Canadian market. (Source: “Molson Coors Canada and HEXO Announce Agreement to Create Joint Venture Focused on Non-Alcoholic, Cannabis-Infused Beverages for the Canadian Market,” Cision, August 1, 2018.)

This shows that, with the recently opened Canadian recreational cannabis market, everyone—including a major brewer—wants a piece of the action.

Analyst Take

In today’s market, the No. 1 reason for investors to consider pot stocks is the growth potential in the marijuana industry. Hexo Corp happens to be one of the fastest-growing ones.

And with its planned acquisition of Newstrike, the company is well positioned to take its business to the next level. When that happens, HEXO stock will likely be trading at a much higher price.