In the last week, HEXO stock has grown roughly 16%. Shares of the Quebec-based cannabis producer are now selling for $4.64 USD and appear to be on a climb. The increase suggests HEXO Corp (TSX:HEXO) (NYSE:HEXO) is bucking recent short-seller accusations that had investors worried.
HEXO Corp recently faced scrutiny from research-firm The Friendly Bear, which placed it under the spotlight for its promotion tactics on Snapchat (NYSE:SNAP). The short-seller suggested HEXO may be violating Canada’s strict advertising laws regarding minors and, as such, could be another “version” of CannTrust (TSX:TRST) (NYSE:CTST). The report was released on July 29, and HEXO stock did succumb initially to the bad press but quickly repaired the damage.
Arguably, the biggest issue with the accusation is its comparison with Toronto’s CannTrust Holdings. This is a company in the midst of serious violations for, effectively, illegally growing cannabis.
To put it in perspective, CannTrust has been “forced to cease cannabis sales while Health Canada decides whether to suspend or revoke its license as a result of an audit that found the company was growing pot in five unlicensed rooms at its Pelham, Ontario, grow-op.”
CTST stock has literally tanked in recent months and even helped to encourage a wider market crash.
But this is an entirely different scenario than HEXO Corp’s. For one thing, violating advertising rules is a far-lesser crime than illegally growing cannabis.
HEXO Stock and Market Wide Downfall
Eyebrows have also been raised regarding the company’s forward guidance that said it would generate $400 million CAD in revenue by the end of 2020. At its current annual run rate of $70 million CAD, that seems like too big a stretch.
But with a 30% market share in Quebec—a province that accounts for 21% of Canada’s population—this accounts for roughly 6.3% market share for the entire country, according to analyst Keith Speights. Investors must take into account Quebec’s presence in other provinces, and importantly, its infused-drinks partnership with Molson Coors (NYSE:TAP).
The partnership—branded as Truss—is ready to roll out a serious line of cannabis drinks by the end of 2019. As HEXO’s VP of Strategic Development, Jay McMillan, puts it:
“We’ll have a very large supply so we’ll be in a good position to be able to meet the demand of the marketplace and at the same time also ensure that we’re meeting the variety that the marketplace wants.”
This line will be lucrative to HEXO Corp and leaves a very big door open to HEXO’s transition into the US market with Molson Coors at its side.
Suddenly, when considering these potentials, that $400 million target doesn’t seem so unrealistic, does it?
But what are your thoughts on HEXO stock? A worthy investment?
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