Please ensure Javascript is enabled for purposes of website accessibility

Is HEXO a Buy?

By Zhiyuan Sun - Mar 27, 2021 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Looking for a high-flying marijuana company trading at a reasonable price? HEXO might be your best bet.

HEXO (HEXO -1.67%) is a Canada-based pot grower that has has several high-flying revenue segments. Not only does it hold a leading position in the country with its dried cannabis brand, but it is also gaining traction in the international cannabis industry via new acquisitions. 

Despite a 145% gain in its stock price over the past year, HEXO shares are still relatively cheap compared to their future potential. Let's look at why investors should feel very excited about what the company has to offer

Woman harvesting cannabis in a hemp field.

Image source: Getty Images.

What's so special about HEXO? 

In the second quarter of 2021 (ended Jan. 31), HEXO's revenue increased by a stunning 94% year over year to $26 million. The pot grower maintained its No. 1 market share in Canada's second-most populous province of Quebec. Its marijuana accounted for 49% of all sales volume in the region. HEXO's output grew as well. Also, the company is in an excellent financial position, with CA$700 million in assets to offset CA$155 million in liabilities.

The pot grower managed to sell 25,608 kilograms (kg) of dried cannabis, compared to 22,305 kg in Q2 2020. Unlike last year, the company finally managed to calculate just how much cannabis to produce and sell. It had seen negligible impairments to its assets for oversupply reasons. Over the past six months, the company cut its operating cash flow loss to CA$14.3 million from CA$85.5 million during the same period a year ago.

Partners & acquisitions

That kind of performance is well worth the eight times revenue investors are currently paying for its stock. What's more, HEXO is partnering with the Molson Coors Brewing Company (TAP 1.12%) to jointly develop cannabis-infused beverages. The company will receive 42.5% of all profits accrued during this venture. Since Molson has operations across North America, HEXO will be able to cross-sell its beverages directly down south, gaining exposure to the booming U.S. cannabis industry.

Despite launching less than a year ago, the company has already snatched the No. 1 beverage position in the Canadian marijuana market from Canopy Growth (CGC 5.67%). Its line of tetrahydrocannabinol (THC) drinks and cannabidiol (CBD) sparkling water generated CA$3.4 million in sales in the past quarter. HEXO's market share varied between 35% and 59% throughout this period.

One of the biggest catalysts HEXO has is its $185 million acquisition of fellow Canadian pot grower, Zenabis Global, which is set to close by year-end. Aside from the Canadian market, Zenabis also has operations in Germany, Malta, Israel, and Australia. The company has 111,000 kg per year of licensed cultivation capacity. 

Although it mainly focuses on medical cannabis, Zenabis also produces its fair share of vapes, oils, sprays, gels, edibles, gummies, and hash. Back in the third quarter of 2020, the company brought in CA$19 million in cannabis revenue, compared to CA$10.6 million in Q3 2019. It is also has a positive operating cash flow, which is significant, as most Canadian marijuana producers are losing money these days. 

What's the verdict? 

HEXO is a busy business. It's been hard at work to connect with fantastic partners, finalize acquisitions, balance supply and demand, and establish long-lasting market control. For these reasons, I think HEXO is one of the top cannabis stocks to buy now -- or at least add to the watchlist.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

HEXO Stock Quote
$0.25 (-1.67%) $0.00
Molson Coors Beverage Company Stock Quote
Molson Coors Beverage Company
$54.33 (1.12%) $0.60
Canopy Growth Stock Quote
Canopy Growth
$5.03 (5.67%) $0.27
Zenabis Global Inc. Stock Quote
Zenabis Global Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.