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Surprise! This Marijuana Stock Is Making a Comeback

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Investors are beginning to realize the shocking truth about marijuana stocks. Things aren’t going well yet, as the shares of five prominent industry players fell again to end the last trading day of April. The average price drop was -2.868%, and only Aphria Inc. ended in the green as it climbed +2.92%.

Among all the decliners, Hexo Corp. (TSX:HEXO) had the largest percentage drop (-6.03%). Yet, the stock still appears to be well positioned for a dramatic comeback. Market observers can’t pinpoint exactly which cannabis company exhibits at least a semblance of consistency. The only reliable gauge is the year-to-date performance.

HEXO stands out

All the weed stocks are positive year-to-date. But judging by the individual stock’s performance, HEXO is outpacing the pack. The stock is up +121.67%, while industry giant Canopy Growth ranks second. Aphria is the poorest performer with over 30.19%.

Does it mean that you can equate the year-to-date performances as trust ratings? Maybe so given that the sector in general has been struggling since the year began. In April alone, HEXO gained over 18.23%. Last March saw an over 17.42% gain. The gain in January was huge (+58.71%), although February was almost flat (+0.94%).

Advantages and risks

The product mix will be the primary catalyst for HEXO’s success. Another advantage is the gross margin, which the company has boosted to 52%. As oils and other cannabis-derivative are sold at higher retail prices, HEXO will derive windfalls as oils account for 23% of the company’s sales.

HEXO became a second-tier cannabis company when it acquired Newstrike Brands. From 108,000 kilograms per year, their peak production capacity has increased to 150,000 kilograms. This recent capacity upgrade will make the company the sixth-largest Canadian cannabis producer.

However, competitors are bound to improve gross margins soon. When the expansion plans of the bigger players are completed, they could build scale up to full production. When that time comes, HEXO will have problems maintaining the present gross margin level, and their strength might ultimately weaken.

Potential money maker

HEXO could be at a disadvantage in terms of production capacity, and predicted supply glut could hurt them. Still, earning enormous profits is not lost on HEXO. The joint venture with Molson Coors to develop nonalcoholic cannabis-infused beverages is the potential moneymaker.

No one knows for sure whether the cannabis beverage market will deliver, but if it does turn out to be a huge success, this could counter the deficiency in production capacity. Molson Coors will surely move mountains to help HEXO achieve its long-term goals. The beverage giant also needs to offset declining beer sales.

Future profit earnings

HEXO’s market capitalization pales in comparison to the industry giants, but none could claim to have a long-term cannabis supply deal. HEXO sealed a five-year 200,000-kilo supply deal with Quebec that’s extendable to six years. Operations are uninterrupted while waiting for other business prospects to materialize.

Assuming the risks are contained, this $2.2-billion weed company could turn revenues into profits faster than market adversaries. That’s exactly  the dramatic comeback that investors are hoping for.

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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.

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