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Hexo (TSX:HEXO) Stock Is up 123% Year to Date: Is This Sustainable?

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$2.1 billion Hexo (TSX:HEXO) can be classified as one of the many cannabis companies that are flying high in a race to capture as much of the multi-billion cannabis market as possible.

With a product offering including pre-rolls, flower, oil, and decarb products, the company has 1.8 million square feet of facilities in Ontario and Quebec and is working hard toward its goal of becoming the premier-branded cannabis company in the edibles space.

As such, Hexo recently acquired Newstrike Brands in an all-stock deal worth $260 million. This combination will mean Hexo will experience an increase in size and reach, and Hexo will have a clear path toward creating specialty products for the edibles market.

In addition to this, in 2018, Hexo announced a partnership with Molson Coors, a joint venture that will be focused on non-alcoholic, cannabis-infused beverages for the Canadian market.

The consumable cannabis market, which is expected to be legalized later this year, is another potentially lucrative market that cannabis companies are working to get a foothold in.

Hexo is well positioned here.

$22.4 billion Canopy Growth (TSX:WEED)(NYSE:CGC) stock has rallied 80% year to date, as this company continues to demonstrate why it is the top cannabis stock to own.

With 4.3 million square feet in operating in Canada, partnerships such as the Constellations Brands partnership, as well as success in its global expansion and 32 patents in its growing intellectual property portfolio of products and technologies, Canopy is a force to be reckoned with.

Taking stock on sustainability

This is all extremely exciting for the long-term viability of the cannabis industry and these two cannabis stocks, but in the short term, where do we stand in terms of sustaining these stock price gains?

Trading at exorbitant price-to-sales multiples, with escalating net losses and growth spending, I can see how these stocks and cannabis stocks in general have big downside in the short term.

Yes, the stocks can grow into these valuations in the long term, but I continue to caution that the short term is fraught with risks for these stock prices.

Aurora Cannabis will be reporting its results on May 14, with Canopy reporting in June, and as these results keep rolling in, we will continue to get a clearer picture on the state of the market and company fundamentals.

Final thoughts

Cannabis stocks remain highly volatile, so your best bet is to take some profits in times of strength (like today) and buy on weakness after a market correction.

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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.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing.

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