The Motley Fool

This Pot Stock Could Benefit From a Recession

Image source: Getty Images

While the coronavirus collapse has hit the market hard, one pot stock could actually gain from the turmoil.

When cannabis stocks were surging in 2018, investors were expecting growth across the board. By 2019, most companies had seen their valuations fall by at least 50%.

Many marijuana producers were building grow facilities for the first time, and revenue forecasts turned out to be riddled with delays and disappointments. By the end of last summer, large producers like Tilray were reporting that pricing was falling off a cliff.

Pot stocks were hurting in 2019, and the coronavirus pandemic of 2020 has made matters worse. Access to capital is drying up quickly. Firms with long-promise promise are now grappling with devastating short-term challenges.

One pot stock can rise about the bear market and succeed where others are failing.

Here’s the problem

To be clear, demand for cannabis continues to rise. Cowen Inc, one of the leading firms covering the pot sector, believes demand in the U.S. alone will hit $80 billion by 2030. That’s an estimate it’s needed to raise several times over the past 24 months. Canadian demand has also surprised. By 2025, it’s expected to approach $8 billion per year.

The problem isn’t demand, it’s supply.

In 2018, investors were enamored with pot. What they didn’t realize was that cannabis is a lot closer to tomatoes and corn than you’d think. At the end of the day, they’re simply crops, with few barriers to entry.

By the start of 2019, every pot company on the planet had immense plans for production growth. This should have sent alarm bells ringing in investors’ ears. Commoditization had arrived.

Pricing has continued to fall as industry supply ramps. This problem won’t get better anytime soon. The coronavirus has complicated matters even more. Pot stocks in early stages of growth will find it difficult to fund their expanding operations. Incoming cash flow remains low, so this is a dire challenge.

But one pot stock has the chance to capitalize.

Traditional companies like Coca-Cola Co and Anheuser Busch Inbev are still interested in exploring cannabis-infused products. The downturn, however, likely limits how much capital they want to bet. That’s a terrific situation for Hexo Corp (TSX:HEXO)(NYSE:HEXO).

Pick this pot stock

Hexo’s business model is perfect for this environment. Most pot producers decided to ramp production as quickly as possible, formulating their own brands to sell to consumers. As commoditization hits, branding will be the best way to prevent price erosion.

But ask yourself this: what are consumers more likely to buy, a pot product from an established brand like Molson Coors Beverage Co, or a pot product from an unknown cannabis start-up? Hexo is betting on the former.

Rather than doing everything itself, Hexo simply built the underlying infrastructure, including grow facilities, research and development departments, and packaging and distribution centers. It then partners with larger brands that consumers already know and love. Molson Coors was actually one of its first partners.

It’s a win-win situation. Hexo can launch branded products with globally recognized names. The partners, meanwhile, don’t need to invest hundreds of millions of dollars to scale their own pot operations.

While pot demand is on the rise, capital is drying up. That’s a perfect scenario to enable Hexo to attract additional Fortune 500 partners and capture market share with trusted products that have existing brand loyalty.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 recommends HEXO. and HEXO.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.