HEXO Corp is a Cannabis Top Pick for a Reason

HEXO Corp. (TSX:HEXO), one of the Canadian marijuana stocks, has a promising market position according to Bank of America

SmallCapPower | April 23, 2019: HEXO Corp. (TSX:HEXO), one of the Canadian cannabis stocks, was named as the Top Pick in the cannabis space by Bank of America analyst Christopher Carey Wednesday, based on the Company’s promising market position. He also initiated coverage of cannabis stocks Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) and Canopy Growth Corporation (TSX:WEED) (NYSE:CGC).

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According to B of A, the Canadian cannabis market supply will outpace domestic consumption by 2021, leading to competition for shelf space. This would provide HEXO with an advantage on the back of its differentiated products and price deflation. HEXO’s strong fundamentals, innovation efforts and potential for additional value-add partnerships make its valuation compelling. Mr. Carey recommended Hexo stock as a ‘Buy’ with a target price of US$10 per share. Following initiation, HEXO’s stock surged ~12% to C$8.85 on Wednesday.

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Mr. Carey is also positive on Aurora Cannabis and Canopy Growth. Aurora Cannabis shares were initiated with a ‘Buy’ rating and a target price of US$11 per share, on its impressive scale coupled with low-cost production model, which help to protect the margins. Canopy Growth stock was recommended as a ‘Buy’ with a target price of US$52 per share.

Bank of America initiated Cronos Group shares with an ‘Underperform’ rating and gives a target price of US$13 per share, a downside of 21% from the current price of $15.75. He says Cronos has impressive fundamentals, but the stock is too expensive at current level.

Mr. Carey wrote, “For Cronos, we expect attractive long-term growth and margins, while also giving credit for the cash from Altria. Despite this, the stock still screens the most expensive in our coverage. A key risk to our rating is that Cronos deploys its recently injected capital for deals in geographies or categories the market deems attractive. Otherwise, we don’t see a case for near-term upside.”

On March 13, 2019, HEXO signed a definitive agreement to acquire Newstrike Brands Ltd, which would boost HEXO’s production capacity to 150,000 kg annually, diversify its domestic market penetration to provinces including Ontario, Quebec, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, and Prince Edward Island and add infrastructure with four cutting-edge production campuses totaling ~1.8 million sq. ft. of cultivation space. Further, the combined entity is estimated to realize annual synergies of $10 million.

HEXO Corp is a global cannabis company, operating 1.8 million sq. ft. of facilities in Ontario and Quebec along with a foothold in Greece to serve the European markets. HEXO stock currently trades at a market capitalization of C$1.9 billion with a price-to-book multiple of 4.4x.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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