Hexo Stock (NYSE:HEXO): Is It A Buy Now?

A selloff in the broader cannabis sector that kicked off in earnest in summer has finally brought Hexo Stock (NYSE:HEXO) down to its lowest price in two years. Several factors contributed to the selloff in Canadian cannabis stocks in recent months.

One of them was uncertainty over Canada’s national election. Some investors feared Justin Trudeau would lose his re-election bid and herald difficult times for the cannabis industry.  The Trudeau administration has been very supportive of the cannabis industry in Canada.

The slow development of Canada’s regulated cannabis market weighed down by slow rollout of cannabis shops in provinces like Ontario also spooked investors, sparking a selloff in Canadian cannabis stocks. Hexo has no doubt been a victim of the selloff. But now the stock has bottomed out and looks poised for a powerful rebound.

Hexo stock closed up 14.5% in the last session, reversing a downtrend witnessed in the several previous sessions. Hexo’s gain in the last session came on big volume too, showing growing investor interest in the stock.

History repeats itself

Hexo stock has a history of bouncing back from the bottom. In late December of 2018, Hexo was trading at one of its lowest price levels at around $3. But the stock soon reversed course and sprinted to $6.10 by the start of February 2019, delivering a 103% return in a space of a little over one month.

By April, the stock was trading at $8.50, delivering a return of more than 180% for investors who picked up the stock at its lows in the fall of 2018. Hexo has bounced back several times this year and currently, the stock is at a spot where it is well-supported for a powerful comeback.

About Hexo Stock

HEXO Corp is a consumer packaged goods cannabis company. It is one of the largest licensed cannabis companies in Canada and operates facilities in Ontario and Quebec provinces. The company is also expanding overseas and has established a footprint in the Eurozone. Hexo serves both medical and recreational cannabis markets with its range of products.

In addition to Hexo’s history of bouncing back from its lows, there are even more reasons to love the stock for the long-term. Here are a few reasons:

• Hexo takes on its biggest competitor head-on

Hexo competes against many companies in Canada’s cannabis market. But its greatest competition is the cannabis black market. Now Hexo has set out to disrupt the black market. The company is introducing new products to entice consumers away from the black market.

Higher prices and limited product selections in the regulated market are some of the reasons people continue to purchase cannabis from the black market. Further complicating the picture for regulated cannabis businesses like Hexo is the scarcity of cannabis shops in some areas. In Ontario, for instance, only 24 cannabis shops have opened in a province of more than 14 million residents.

Therefore, the cannabis black market continues to dwarf the regulated market in Canada. For example, the sale of regulated cannabis products reached only $1.0 billion in the first year of pot legalization in Canada. But that is significantly smaller than the cannabis black market that pulled roughly $5.0 billion – $7.0 billion in sales in the first year of legalization.

Last month, Hexo launched a new cannabis brand called Original Stash that is aimed at disrupting the black market. Original Stash is competitively priced to lure consumers who may be drawn to cheap black market products. If Original Stash becomes a hit, it would not only help Hexo squeeze the black market but also boost its revenue and give it a bigger share of the cannabis market in Canada.

• Hexo continues robust revenue growth

Hexo’s revenue for fiscal 2019 ended July 31 hit C$59.3 million from C$4.9 million in the previous year, representing a growth of 1,110%. Hexo’s sales to the recreational cannabis market, which opened in Canada in October 2018, represented 72% of fiscal 2019 revenue.

“We are at the end of the first year of adult-use legalization in Canada, which was an incredible year full of successes and challenges across the industry.  We’ve gone from $4.9M to $59.3M in gross revenue in just one year.

“This type of revenue growth is a testament to the company’s resilience and capacity to pivot in the face of uncertainty,” commented Sebastien St-Louis, co-founder and CEO of HEXO Corp.

Canada recently expanded its cannabis market with the legalization of more pot-based products. The sale of the newly legalized pot products in Canada will kick off next month and Hexo has adequately prepared to take full advantage of the expanded market. For example, Hexo teamed up Molson Coors Brewing to make a line of cannabis drinks that will go on sale immediately the sale of newly legalized cannabis products kicks off.

Experts predict that the recent legalization of more cannabis products could see Canada’s recreational cannabis market double to C$2.4 billion next year.

• Hexo sets sights on profitability

Hexo made a net loss of C$18 million in its fiscal 2019 ended July 31. But the company has set its sights on profitability and is employing a variety of strategies to get there. For example, Hexo recently cut hundreds of jobs and has idled its Niagara facility in a bid to cut costs. Moreover, Hexo hopes growing revenue fastest will help it attain its profitability target, which is why the company wants to make good use of the expanded recreational cannabis market in Canada.

Bottom line

Hexo has dropped significantly amid a broad selloff in cannabis stocks. But looking at Hexo’s history of bouncing back and seeing how the company has positioned itself to drive revenue growth, it looks to be an attractive cannabis bet at current levels.

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Disclosure: We have no position in Hexo stock and have not been compensated for this article.