Does Hexo Corp (TSX:HEXO) Still Have 300% Upside This Year?

Hexo Corp (TSX:HEXO) was my top cannabis stock for 2019. After a run-up, should investors still be bullish?

| More on:
edit Jars of marijuana

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In January, I named Hexo (TSX:HEXO) my favourite pot stock for 2019. My conclusion was that shares potentially had 300% upside.

Since that call, Hexo stock has popped by around 25%. Compared to my previous predictions, that leaves plenty of upside left for investors. “The road will continue to be bumpy,” I wrote a few months ago, “but there are plenty of exciting reasons for Hexo to be my top pot stock for the year ahead.”

Is Hexo still your best bet among an increasingly crowded cannabis industry?

Catch up on this news

Several notable events have happened since my last article.

First, Wall Street analysts have added specific forecasts to support the rapid rise of the cannabis industry. Vivien Azer, an analyst at Cowen, now expects the U.S. market to total $80 billion over the next decade. That’s impressive considering it started from nearly nothing. New markets should make this forecast a reality.

For example, in January, the governor of New York proposed legalizing marijuana in 2019, noting that legal weed sales could generate US$300 million in tax revenues per year. Even republican-controlled Florida is looking to ease up on strict cannabis regulations. Recently, its governor revealed that it wouldn’t fight smokable medical marijuana, leading many investors to believe the state will eventually trend towards recreational legalization.

Meanwhile, Canada’s cannabis market is expected to surpass $10 billion over the next few years. The medical marijuana segment of that market alone is expected to quadruple by 2025.

With hard numbers backing the industry’s growth, it’s no surprise that most cannabis stocks have shot higher in recent months.

Can Hexo still execute?

With strong industry tailwinds, all that’s left to do is for Hexo to execute its growth plans. On January 30, the company sold $57.6 million worth of shares at $6.50 apiece to fund its expansion initiatives. While dilution isn’t always welcome, it’s important to note that Hexo seems to be fulfilling its promises to shareholders.

For example, its 1,000,000-square-foot growing facility is now operational. Production is expected to steadily increase throughout 2019. More importantly, however, Hexo seems to be making progress on its branded lineup.

When deciding which cannabis stocks to buy, there’s one major factor to consider: branding. Many analysts and investors are myopically focused on industry growth, but if a grower can’t brand its product, it will be forced to take commoditized prices.

Earlier this year, the New York Post reported that Oregon was “drowning” in more than one million pounds of excess weed. If you don’t differentiate your production somehow, pricing collapses due to oversupply can be deadly.

That risk is what makes Hexo’s joint venture with Molson Coors Canada so interesting. The goal of the partnership is to bring branded cannabis-infused beverages to North American markets. If Coca-Cola is any example, branded beverages have the potential to generate profit margins well beyond those of generic cannabis.

While most investors are paying attention to general cannabis production numbers, I’d place much more value on the company’s partnership with Molson Coors. It may take some time to begin contributing to Hexo’s bottom line, but this stock is still my clear favourite among a competitive cannabis market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of Molson Coors Brewing. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Cannabis Stocks

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Should You Stay Away From HEXO Stock?

HEXO (TSX:HEXO)(NASDAQ:HEXO) stock is on a downward spiral, and there is little hope it is going to recover soon.

Read more »

edit Cannabis leaves of a plant on a dark background
Cannabis Stocks

Why Did Aurora Cannabis (TSX:ACB) Stock Plunge 75% in 2022?

A prominent cannabis stock has plunged by 75% in 2022, as the company’s losses continue to mount in the face…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Fire & Flower: A Small Pot Stock Poised for Strong Growth

Fire & Flower is a cannabis retailer well-positioned for growth thanks to its digital and delivery initiatives.

Read more »

edit Jars of marijuana
Cannabis Stocks

Why Aurora Cannabis (TSX:ACB) Stock Is Sinking This Week

Starting another round of capital raising has hurt investor sentiments, and the Canadian cannabis giant’s performance on the stock market…

Read more »

edit Jars of marijuana
Cannabis Stocks

Why Canopy Growth (TSX:WEED) Stock Plunged 19% Last Week

Canopy Growth Corp. (TSX:WEED)(NASDAQ:CGC) stock has plunged after the release of its final fiscal 2022 results.

Read more »

Cannabis stocks have fallen.
Cannabis Stocks

Why Aurora Cannabis (TSX:ACB) Stock Tanked 45% Last Week

There's no respite for Aurora Cannabis investors!

Read more »

Money growing in soil , Business success concept.
Cannabis Stocks

TFSA Investors: This Undervalued Gem Could Turn $6,000 Into $25,000

Here's why TFSA investors can hold undervalued growth stocks such as Verano in their portfolios right now.

Read more »

TSX Today
Cannabis Stocks

TSX Today: What to Watch for in Stocks on Monday, May 30

TSX investors should keep a close eye on the latest manufacturing data from China today.

Read more »