Though the bulk of cannabis stock-mania to date has focused on Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY), Aurora Cannabis (NYSE:ACB) and Cronos Group (NASDAQ:CRON),arguably the most compelling pick in the bunch, Hexo (NYSEAMERICAN:HEXO), has been habitually overlooked.
That’s changing though, and for good reason. As marijuana-stock mania continues to mature and investors are willing and able to start judging these companies on their individual merits, they’re finding HEXO is about as well-positioned for growth as any other name in the business. Although the Hexo stock price feels frothy now, this quiet name may be one of the better options for newcomers looking for exposure to marijuana stocks.
Bank of America’s Christopher Carey agrees.
What Makes HEXO Different?
At first glance, it’s easy to assume all marijuana stocks are the same.
Take a closer look, though, and it becomes clear they’re not. Aurora, for instance, has made it clear it’s first and foremost hoping to make a meaningful shift into the medicinal market, and is steering clear of beverages. Canopy Growth has mastered its appeal to recreational users. Each name in the business, in fact, is now cultivating one or more niche.
So what makes HEXO different? A couple of things.
One of them, oddly enough, is geography.
Though recreational cannabis is now legal everywhere in Canada, one of the proverbial epicenters of the movement has been Quebec, where HEXO sells roughly one-third of all cannabis bought. Its long-term supply contract should keep it positioned as the market leader there for the foreseeable future.
The overarching difference between HEXO and its peers, however, is its plans to penetrate the still-budding edibles and beverage market, in the U.S. and Canada, along with its giant partner and its history of innovation.
It’s a tricky and unproven arena, one of the reasons Aurora Cannabis has no current plans to produce a beverage line. But HEXO will have plenty of competition in that market. Constellation Brands (NYSE:STZ) and Canopy Growth are teaming up on beverages, and New Age Beverages (NASDAQ:NBEV) has already launched a cannabis-infused line, using the brand name Marley (as in Bob Marley).
HEXO has something of an ace up its sleeve on this front, though. It’s already working with alcohol giant Molson Coors Brewing (NYSE:TAP) to bring beverages to the Canadian market, a market that may be worth on the order of $3 billion, before the end of the year.
Though Constellation and Canopy will provide formidable competition, Molson thinks HEXO was the better partner. It would know, too. It held discussions with Aurora Cannabis and Aphria (NYSE:APHA) along with two other unnamed outfits, but Frederic Landtmeters, the CEO of Molson Coors Canada, ultimately concluded it was Hexo’s “track record of innovation” that would make it the highest-potential partner.
Then there’s the detail investors have likely overlooked; Hexo is arguably better prepared to get a foothold in the growing U.S. market than most cannabis companies.
Hexo USA was only officially launched a couple of weeks ago, but its CEO, Sebastien St. Louis, has already been in the United States for a while, speaking with investors, laying the groundwork for the company’s future in the country.
What that future has in store remains unclear, particularly given the fact that recreational cannabis and even medical marijuana remain illegal in much of the United States. But Oppenheimer analyst Rupesh Parikh noted in February, when he first started covering Hexo stock, that he expects HEXO to develop partnerships in non-beverage categories like cosmetics, edibles and vapes. That’s important simply because, in the United States and Canada, consumers who are interested in trying cannabis for the first time are more likely to do so by eating or drinking it rather than smoking it.
Others are already in the space, to be clear, but no cannabis company has yet entered into an edibles-oriented partnership from a major name. HEXO may be quietly mulling the industry’s first such deal, if Parikh’s instinct is on target.
Looking Ahead for Hexo Stock
Bank of America’s Christopher Carey noted in April, “HEXO is our Top Pick in cannabis, screening compelling in our valuation framework vs peers (EV/sales and DCF), and with fundamentals grounded by the most de-risked cannabis supply in Canada (off-take with Quebec), an innovation-forward organization and potential for additional value-add partnerships (beyond that already developed with Molson Canada).”
HEXO alluded to such value-added partnerships when Hexo USA was launched, bolstering comments already offered by Oppenheimer. And Molson has already noted how innovative the company has been.
The assessments remain largely the same from one impartial observer to the next.
Hexo stock may not be the absolute top pick in the cannabis space, as Carey suggests, but there’s no denying HEXO is a marijuana stock that’s been erroneously ignored.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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