In 2018, investors made a fortune with pot stocks. Every company was doubling, tripling, or even quadrupling in price. It was like shooting fish in a barrel with all the water drained out.
The 2019 bear market changed everything. The hype cycle ended, and many competitors never recovered.
The COVID-19 crisis of 2020 continued the pain. Most pot stocks still trade at a fraction of their former worth. Underlying demand, meanwhile, continues to rise.
If you’re willing to think long term, the cannabis industry is the perfect place to make big gains. Expectations are at rock bottom. A little bit of risk can result in extraordinary returns.
The best pot stock right now is a $380 million business that could easily be worth $1 billion over the next few years.
When bubbles burst, most companies get left in the dust — and for good reason. Following a painful bear market in an emerging industry, many competitors fail to secure much-needed financing. Several pot stocks are now defunct.
But if you go through the small-cap end of the bargain bin, you’ll find some diamonds in the rough. This is where big money will be made.
With a $380 million price tag, Hexo (TSX:HEXO)(NYSE:HEXO) is a prime candidate. In 2018, the firm had a multi-billion dollar market cap. Following the bear market, it seems like investors and analysts have left the company for dead. They’re wrong.
Success in the pot industry never hinged on how much marijuana a company could produce. Raw cannabis is a commodity, with no greater profit potential than potatoes or carrots.
The key has always been to create differentiated products. Branded, value-add cannabis fetches a premium, with greater customer loyalty. It’s how pot stocks can escape the commodity trap.
Most competitors were focused on pure output, but from the beginning, Hexo aimed to be different.
Bet on this pot stock?
Hexo built the industry’s first cannabis platform. This is the key to its future success.
What exactly is a cannabis platform?
Consider Microsoft Windows. Microsoft built the underlying software, and third-party developers built the vast majority of applications. Microsoft was able to crowdsource talent and effort from all of the world using a platform model.
Hexo runs a similar approach. It established the required cannabis production, processing, packaging, and distribution infrastructure. Unlike other pot stocks, it allows any external company to plug into this infrastructure, just like Microsoft did with apps.
The company already has early success, validating its platform model. Last year, it partnered with Molson Coors to co-create cannabis-infused beverages in Canada. Earlier this year, it expanded the partnership to include the U.S., greatly increasing the partnership’s value.
Hexo has what other pot stocks are missing: a long-term path to profits. Its value-add products, backed by brands consumers already know and love, will fetch a premium versus raw cannabis. Armed with a platform model, the company can easily add more partners in categories like edibles, cosmetics, medicines, and more.
As sales start to materialize over the next 12 to 24 months, expect plenty of upside.
Our highest upside stock pick is below.
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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.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool recommends HEXO. and HEXO and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. Fool contributor Ryan Vanzo has no position in any stocks mentioned.