Is this the start of a big rally for HEXO?

As the drought continues in the cannabis sector, many of us are wondering when it’s going to end and which companies are going to stray away from the pack and start to outperform first. When it comes to HEXO, the stock was performing like most other cannabis companies until recently and there are a few reasons why we think that things could be changing. 

As HEXO declined with the broader cannabis index it fell to $5 and has bounced off that level three times already. As valuations drop, these companies become more attractive in the eyes of not just retail investors but analysts as well. HEXO recently received coverage from MKM Partners with a buy rating and a $12 price target. What makes HEXO stand out from other cannabis companies that have landed it a #1 buy rating from Bank of America?

HEXO has previously mentioned that it will take a three-pronged approach that will deliver on its goal of becoming a top-three global cannabis firm. The model is simple, operational stability; product innovation; and, brand leadership. HEXO has invested heavily in a highly skilled team of scientists, chemists, and those with industry experience working at fortune 500 companies like Kelloggs and Coca Cola. HEXO currently has 25 PhDs on staff, with the R&D department developing innovative products being the main focus. HEXO is well known for its joint venture with Molson Coors Canada that is focused on non-alcoholic, cannabis-infused beverages. Molson Coors Canada has a 57.5% controlling interest in Truss, their joint venture, with HEXO Corp having the remaining ownership interest (42.5%). This could prove to be an extremely valuable asset when the launch of Cannabis 2.0 market opens up, which includes cannabis edibles, cannabis-infused beverages, extracts, and various other products. HEXO will be able to leverage the massive deep routed distribution network that Molson Coors has spent years building when the 2.0 market does eventually open up which could generate some big revenue numbers.

At this point in the game, investors are getting impatient and want these companies to show a clear path to profitability and this could be one way that HEXO will get there. HEXO has also secured around 200,000 kgs of hemp supply for CBD extraction for fiscal 2020. The fact that HEXO is also taking an approach to CBD we feel is very important as CBD appeals to a wider audience who prefer the non-psychoactive health benefits CBD offers as opposed to THC. Some risks that remain for HEXO is the fact that the company is still waiting on legalization of the secondary market in Canada as well as legalization in eight states in the US.

As investors grow more and more impatient and valuations continue to plunge, investors with nerves of steel and massive amounts of patience should be rewarded when the cannabis sector starts to deliver the numbers we are looking for. As for HEXO, we feel that at these current levels the company has a very attractive valuation next to its peers and a bright future ahead of it. The company remains on the top of our watchlist for 2019 and beyond. 

(Disclaimer: The author owns shares of HEXO)

HEXO Corp. (HEXO) was trading at $4.24 per share on Tuesday morning, down $0.16 (-3.64%). Year-to-date, HEXO has declined N/A%, versus a 12.54% rise in the benchmark S&P 500 index during the same period.