This is Why Hexo Corp (NYSE:HEXO) Is A Buy

Hexo Corp (NYSE: HEXO) is one of Canada’s success stories with significant growth potential. A buyout of Newstrike Brands for $263 million underscores the company’s credentials as it seeks to become an industry leader in the multi-billion sector.

Hexo Corp Price Analysis 

The stock has also taken off in the market on huge volume, in what is turning out to be an inflection year, after the underperformance of last year. A 100% plus spike in share price, since the start of the year, could as well signal the stock’s break out credentials.

With the stock currently trading in a steep uptrend, further gains could be on the offing given the underlying fundamentals that continue to fuel the upside action.  For starters, the company is fresh from inking a multi-year extraction agreement with Valens that will see it supply a minimum of 30,000kg cannabis and hemp biomass.

A spike in Hexo share price also comes on the heels of an analyst at Bank of America initiated coverage of the stock with a ‘buy’ rating. A rally past the $7 a share resistance level has since opened the door for the stock to continue edging higher in continuation of the long-term bull trend.

Pullbacks have so far emerged as entry positions from where bulls have come back and continued to push the stock higher. Conversely, any pullback, back to the $7 support level could trigger further upside action, as has been the case for the better part of the year.

About Hexo Corp

Through its subsidiaries, Hexo Corp produces markets and sells cannabis and its derivatives in Canada. The company also offers dried cannabis under the Time of Day and H2 lines. The products are offered under the Hexo and Hydropothecary brand names.

Hexo Corp Buy Rating

Shares of Hexo have been on the move in recent weeks on Bank of America analyst, Christopher Carey, reiterating that the stock is a strong ‘buy’ in response to recent developments. According to the analyst, the stock is a top pick in the cannabis sector; thus the $10 price target.

According to the analyst, Hexo is an ideal pick in part because of its low valuation supported by an annualized revenue of $40 million. The company has also inked cannabis supply agreements with four provincial agreements that could be worth billions of dollars in revenue over the next few years.

Hexo moving with speed to take advantage of the growing demand for cannabis products is another development that justifies the buy rating according to the analyst. In addition to positioning itself for growth in Canada, the company has also set sights on international markets in pursuit of growth opportunities.

Cannabis Production Capacity Boost

The development of a 350,000 square foot facility in Greece underscores the company’s push for growth in the European market. Once the production facility is up and running, the company should be able to supply medical marijuana markets across the EU.

The acquisition of Newstrike Brands is poised to more than quadruple Hexo cannabis cultivation space to 2.3 million square foot. With the large cultivation space, the company should be able to ramp up cultivation and production capacity, to cater to the growing cannabis demand back at home and abroad

Hexo has already inked a deal that will see its supply Valens GroWorks, a minimum of 30,000 kg of cannabis and hemp biomass a year.

“HEXO is pleased to work with a quality organization like Valens. On the eve of edibles and concentrate legalization in Canada, this agreement will allow our company to bring an expanded offering to market, creating innovative products to deliver exceptional cannabis experiences to consumers,” said James McMillan, Vice-President of Strategic Business Development at HEXO Corp.

A balance sheet with CA$224 million in working capital leaves the company well financed to pursue growth initiatives, ideal for generating shareholder value.  As it stands, Hexo remains well positioned to start producing positive cash flow as it continues to ramp up sales on improved cannabis production.

Bottom Line

Hexo is an exciting fundamental investment as it continues to send shockwaves in the cannabis sector. The acquisition of Newstrike Brands has all but reinvigorated the company’s growth metrics given the synergies of expanded cannabis cultivation and production at stake.

The stock is a solid buy on pullbacks after the recent spike as it continues to outperform the overall market.

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