Hexo (NYSE:HEXO) has been on my radar for a while, and not in a good way. Hexo stock seems to consistently find new ways to disappoint.
Over the past few months, I’ve said over and over and over again that investors should avoid shares of the Canadian cannabis producer.
The thesis has remained consistent, and simple. There are simply way too many cannabis companies out there. Most of them won’t survive as the global cannabis market matures and consolidates around a few large winners. At present, HEXO does not project as one of those few winners. Instead, it projects as just another cannabis company that will get squeezed out of the market. As such, HEXO stock theoretically projects to drop to zero.
Apparently, the market thinks this is the case, too. HEXO has lost more than 70% of its value from its late April highs and is gradually making its way towards literal penny-stock territory.
To be sure, HEXO could pop in 2020 amid a broader rebound in the cannabis sector, but even if that bounce does materialize, I don’t think it’s sustainable. Instead, in the long run, the most likely outcome for HEXO is for this company to become irrelevant in the cannabis market and for the stock to keep moving lower.
Pot Stocks Could Bounce
In 2020, pot stocks could bounce, and that could create a rising tide which lifts HEXO, too.
Specifically, in 2020 you will get a convergence of multiple positive developments in the cannabis market. Canadian market demand trends should improve as cannabis 2.0 products (including edibles and vapes) come to market. Demand trends should also improve thanks to production capacity expansion in the legal channel, as well as sustained retail footprint expansion.
At the same time, U.S. legislation is finally making progress, with the House recently approving the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act. That sets up 2020 to be a pivotal year on the U.S. federal legalization front.
Even further, pot stocks have been killed in 2019, so they are positioned to rise in 2020 on any goods news. Improving Canadian market demand trends and U.S. legislation progress constitute as good news.
Connecting the dots, it’s easy to see how pot stocks could bounce back in 2020. If they do, then HEXO will likely rise with the group.
HEXO Should Continue to Be Avoided
Although HEXO could bounce in 2020, I still think shares should be avoided. Why? Because such a bounce may not happen, and even if it does, it’s not sustainable.
Zooming out, the big problem with HEXO stock is that there are too many companies in the cannabis market, most of these companies will go bust (not boom), and HEXO doesn’t differentiate itself enough in the marketplace to warrant the company being seen as one of the few long-term winners.
Just look at the alcoholic beverage or tobacco industries. Globally, there are fewer than 10 alcoholic beverage companies that pull in more than $10 billion in annual sales. Meanwhile, the global tobacco industry is controlled by six big companies. The global cannabis industry will look the same one day, meaning that this market will birth between five and 10 big winners globally.
In Canada alone, there are about a dozen publicly traded cannabis companies, including HEXO, Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), Aphria (NYSE:APHA), Tilray (NASDAQ:TLRY), Cronos (NASDAQ:CRON), and more. That’s in Canada alone, and it’s just year two of the cannabis market. Over time, and as the market expands geographically, there will be many, many more new entrants.
And yet, at the end of the day, there will only five to 10 cannabis companies left standing. Will HEXO be one of them? Probably not. The company isn’t bigger than its peers. Nor do they have more growing capacity. Nor is their balance sheet equipped with a ton of resources. They aren’t backed by any major consumer goods company. There aren’t any unique or compelling international deals.
There’s nothing special. And, without anything special, HEXO will a tough time beating the odds of cannabis market consolidation.
Bottom Line on HEXO Stock
Continue to stay way from HEXO stock. Shares may bounce in 2020 amid a broader cannabis sector rebound. But, such strength won’t last. Fade that rally, and continue to avoid HEXO.
As of this writing, Luke Lango was long CGC.