The back-to-back legalization of cannabis for recreational and medical purposes in Canada and the U.S. has been a huge boost for cannabis stocks. Indeed, this has been a key driver of the speculative bounce we’ve seen in these stocks from the lows of March last year.
Certainly, valuations have gotten quite bloated. Some some analysts are quick to point out that the valuations in this sector may have gotten ahead of the fundamentals. Indeed, such is the same with Canadian cannabis producer Hexo Corp (TSX:HEXO)(NYSE:HEXO).
However, I think Hexo’s long-term growth potential does provide an interesting option for risk-seeking investors today. I understand the investment thesis with this stock. It’s got decent fundamentals, and a strong market position right now.
Accordingly, Hexo is my top pick in the domestic cannabis space. I think this company has some leverage to legalization in the U.S. Indeed, this is a hybrid play in the cannabis space with unique catalysts I think could take this stock higher over the medium-term.
Let’s dive into this a bit more.
A great domestic cannabis play
Hexo has been a leading cannabis player in the Canadian market. Indeed, Hexo’s strong regional focus in Quebec and other markets is likely to be a key driver for this stock long-term. The company’s done a great job of securing favorable contracts with provincial buyers. Indeed, Hexo’s Quebec home base could be beneficial for investors seeking domestic Canadian plays. The Quebec government has been shown to show a lot of love for home-grown companies. Until that changes, Hexo appears to be in a great position in its core markets.
Even though Hexo lacks a meaningful footprint in the U.S., the company does have a cannabis-infused product line that is making inroads in the U.S. market. Accordingly, investors bullish on the “cannabis 2.0” rollout will want to consider Hexo right now. In terms of Canadian players, Hexo is leading on some metrics.
The company’s got tonnes of potential to expand its operations south of the border, even without legalization taking hold for some time. Indeed, that’s a good thing for investors seeking a strong domestic player with leverage toward U.S. legalization today.
Entry into Europe a big deal
Hexo’s move to enter the European market comes as investors look to pick winners coming out of the global legalization rush. Recently, Hexo decided to acquire Zenabis Global (TSX:ZENA) for $235 million.
Though Zenabis focuses mostly on medical marijuana, it also produces other value-added products as well. These include edibles, gels, hash, gummies, vapes, oil, and sprays. Hexo hopes this move will increase its international presence substantially. I think this move certainly has the potential to do so. However, these value-added products could also turn out to be a hit in the Canadian market as well.
Indeed, there are a few reasons to be excited about Hexo right now. The company’s making positive strategic moves to expand, while focusing on its core domestic business. Hexo’s fundamentals are among the best of its peers. Accordingly, if the company’s European expansion efforts are a success, investors should be well-rewarded over the long-run.
This move will also remove some of the concern around Hexo’s limited U.S. exposure. Overall, it’s a good deal.
