Hexo Corp: Why This $4.39 Pot Stock Could Soar

HEXO Corp This $4.39 Pot Stock Could Go Higher, Here's Why
iStock.com/Yevhenii Orlov

Don’t Ignore This Beaten-Down Pot Stock

Marijuana is an industry that the bears love to hate. Because most companies in the sector are in the growing stage of their business, they don’t have impressive earnings at the moment.

And after the industry’s massive stock rally in the past two years or so, valuation certainly looks bloated. As a result, there are plenty of critics saying that cannabis stocks are doomed.

It doesn’t help the case that sentiment hasn’t been bullish toward the pot stock market lately. Over the past three months, the North American Marijuana Index plunged more than 25%. (Source: “North American Marijuana Index,” The Marijuana Index, last accessed August 2, 2019.)

Hexo Corp (NYSE:HEXO) happens to be one of the beaten-down tickers. The company’s share price went from $7.46 to $4.39 in the last three months, marking a drop of over 40%.

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Needless to say, those who held HEXO stock during this period weren’t really pleased with the share price performance. But here’s the thing: because the company’s outlook remains solid, the massive drop in Hexo’s share price could represent an opportunity for investors looking to get some exposure to the fast-growing legal cannabis industry.

You see, Hexo Corp is a Canadian pot producer headquartered in Gatineau, Quebec. Its stock trades on both the New York Stock Exchange and the Toronto Stock Exchange under the symbol “HEXO,” so it’s very convenient for investors in both countries to buy and sell the company’s shares.

The reason why investors have loved pot stocks so much over the past several years is the industry’s growth potential. And while HEXO stock doesn’t look like an investor favorite at the moment, the company is still churning out some very impressive growth numbers.

Hexo Corp Is Running a Fast-Growing Business

In the third quarter of Hexo’s fiscal-year 2019, which ended April 30, the company generated gross cannabis revenue of CA$15.93 million. Compared to the CA$1.24 million it earned in the year-ago period, the company’s latest result marked a staggering 1,185% increase. (Source: “HEXO Corp Reports Third Quarter 2019 Financial Results,” Hexo Corp, June 12, 2019.)

Notably, the company’s gross revenue just from selling recreational cannabis in this three-month period was 196% higher than its total revenue earned in the entire fiscal 2018.

The success is actually quite easy to understand: Hexo is selling a lot more weed.

Canada legalized recreational marijuana for adult use on October 17, 2018. In the first quarter of Hexo’s fiscal 2019, which ended October 31, 2018, the company sold 952 kilograms (2,099 pounds) of recreational pot.

In its second fiscal quarter, which ended January 31, 2019, Hexo’s recreational cannabis sales grew to 2,537 kilograms (5,593 pounds). And that number continued to grow, reaching 2,759 kilograms (6,082 pounds) in the company’s third fiscal quarter.

In a market where demand is getting stronger and stronger, producers need to ramp up their production capacity in order to capitalize on that booming demand. The good news is that this is exactly what Hexo Corp has been doing: the company produced 9,804 kilograms (21,614 pounds) of pot in the third fiscal quarter, nearly double the 4,938 kilograms (10,886 pounds) produced in the previous quarter.

A New Catalyst for HEXO Stock?

And don’t think for one second that Hexo Corp is done with its growth story. Going forward, there is a catalyst that could significantly increase HEXO stock’s investor appeal.

I’m talking about the company’s recently completed acquisition of Newstrike Brands Ltd. The transaction gives Hexo Corp access to four production campuses that consist of nearly 1.8 million square feet of near-term cultivation space.  (Source: “HEXO Corp. Announces Acquisition of Securities of Newstrike Brands LTd.” Hexo Corp, May 28, 2019.)

Combined with Hexo’s existing facility, the acquisition is expected to boost the company’s annual cannabis production capacity to 150,000 kilograms (330,693 pounds).

The best part is, with the closing of this deal, Hexo is now on track to achieve CA$400 million in revenue in its fiscal 2020.

Hexo Corp (NYSE:HEXO) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

As I mentioned earlier, HEXO stock hasn’t been a hot commodity lately. But the company’s growth story remains intact.

If this cannabis producer can deliver its target CA$400.0 million in revenue in its fiscal 2020—an amount that is many times more than what it is earning now—investors will likely take a second look at the company. By that time, I wouldn’t be surprised to see Hexo Corp’s shares trading at much higher prices.