Why is everyone talking about the HEXO action?

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Since the beginning of the year, actions of the cannabis consumer society HEXO (NYSE: HEXO) have decreased by more than 50%. Related to S&P 500the drop of only 3% since the start of the year, the performance of the HEXO share is appalling.

Indeed, although the company’s core business is growing, the total number of HEXO shares outstanding has been diluted by 75% since January, and the company continues to raise endless funds in sight.

While investors are concerned about the capital problems of HEXO, the company has made significant progress in its expansion. More and more investors are starting to take an interest in the stock now that its annual production capacity can increase significantly. Let’s see why everyone is talking about HEXO stocks and why it is a solid buy.

Image source: Getty Images.

A growing leader in the cannabis industry

On June 1, HEXO announced that its 2 million square foot cannabis plant in Belleville, Ontario has received its sales license from Health Canada. If all goes well, HEXO should be on track to reach over 150,000 kg of its annual production capacity. Its cannabis products are 40% cheaper than its peers, with a net selling price of CAN $ 3,190 per kilogram on its main products.

Thanks to these measures, HEXO has become the fourth largest producer of cannabis by volume in Canada, gaining more than 30% of the market share in Quebec.

Hexo’s financial performance was also excellent, with revenues more than doubling to C $ 30.1 million in the third quarter of 2020 compared to the same period last year.

As sales increased, losses from HEXO also decreased. In the third quarter of 2020, the company saw its year-over-year net losses drop to C $ 20.7 million from C $ 23.2 million, and core expenses decrease to C $ 25.7 million CA $ 23.2 million.

I do not expect the company to be negatively affected by the COVID-19 pandemic. On the contrary, sales have increased as more people turn to marijuana to cope with the effects of anxiety, loneliness and isolation caused by measures designed to contain COVID-19. Remember, Canada has not yet lifted its quarantine and lockdown measures completely.

Just in March, Statistics Canada reported total cannabis sales of C $ 181 million, which represents an annual rate of C $ 2.2 billion for 2020. However, it is essential to keep in mind that sales of marijuana continue to grow, and actual industry estimates for the total market size in Canada range from CAD 7-10 billion. There was also a strong demand for marijuana in the months following March.

Points to remember for investors

As HEXO’s losses have decreased, I expect management to reconsider the dilution of its shares. The company currently has more than C $ 95.3 million in cash and investments, despite additional funding of C $ 25.5 million in June.

Even if the company continues to dilute its shares, HEXO shares are cheap enough to offset this risk. With an annual sales rate of C $ 120 million and a market capitalization just north of $ 300 million, HEXO is trading at just over 3.5 times the price compared to sales.

The stock is certainly cheap at this point. It is very close to a turnaround, with the company recognizing less than $ 5 million in loss of profits before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2020, with forecasts that EBITDA will be positive for all the year.

With a gross margin improving to 40% and a joint venture with Molson Coors (NYSE: TAP) To develop cannabis infused drinks, I think HEXO is an excellent cannabis growing stock that can offset much of its risk of dilution.



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