Cannabis stocks are all the rage these days, surging to new highs on any piece of positive news. Investors who got in early have chalked up some nice gains, and those who missed the rally are wondering which companies might still be attractive buy-and-hold picks.
Let’s take a look at Hexo (TSX:HEXO) to see if it deserves to be in your portfolio today.
Rapid growth
Formerly known as Hydropothecary, Hexo has gone from being a startup in 2015 to a significant challenger in the Canadian medical marijuana sector and is poised to play a major role in the evolution of Canada’s recreational marijuana market.
The Quebec-based company has already sold more than one million grams of medical cannabis to Canadian patients across the country and has won the confidence of investors, raising more than $300 million in the past year.
New products
The company is undertaking an innovative approach to product development, as smoke-free cannabis demand is widely viewed as a huge opportunity for the industry. In July, Hexo launched its Fleur de Lune intimate oil, currently targeted at the medical cannabis market. The TCH oil is being pitched as a discreet way for medical cannabis users to consume their medicine.
Once the recreational market opens next month, the product could be a big hit with a certain segment of the market. It could also put some serious cash in the hands of Hexo and its shareholders. The 60 ml Fleur de Lune spray bottle launched at $59.
Beverage partnership
At the beginning of August, Hexo announced an agreement with Molson Coors Canada to form a joint venture to explore opportunities to create cannabis-infused beverages for the Canadian market once legalization occurs. Under the agreement, Molson Coors will control 57.5% of the newly formed company, while Hexo will own 42.5%.
The deal comes as spirits companies scramble to get a foothold in the sector. Corona’s parent Constellation Brands kicked off the race last fall when it took a 9.9% position in Canopy Growth. The company then increased its investment by $5 billion in mid-August, taking its stake to 38%. That announcement is credited for kick-starting the latest rally across the sector.
Hexo’s deal with Canada’s leading brewer puts it right at the forefront of the race.
Should you buy?
Hexo is ramping up its national strategy to be a major player in the Canadian market for a wide variety of cannabis products, including cosmetics, non-alcoholic beverages, vapes, and edibles.
The company just announced the purchase of a stake in a massive facility in Belleville, Ontario. The two-million-square-foot site is a former Sears distribution centre and is strategically located to enable Hexo to process and fulfill orders as it expands its hub-and-spoke model.
Hexo currently has more than 300,000 square feet of production capacity with another one million square feet on the way by the end of 2018. This should position the company well to compete in the coming recreational market.
Overall, Hexo appears to be on track.
Risk?
At the time of writing, the stock trades for $8.45 per share, which is roughly double where it was a month ago. At a market capitalization of $1.6 billion, the investment is tough to justify unless you are convinced the market will explode as predicted. Revenue for the quarter ended April 30 was just $1.24 million.
There is a chance Hexo will get bought by one of its larger peers, or possibly by Molson Coors, as consolidation continues, so more upside could certainly be on the way. That said, I would keep any speculative position small or wait for a pullback. The rally the entire sector has enjoyed in recent weeks appears overdone, even by marijuana-stock standards.
Other opportunities might be better picks today.
