Is Popular Cannabis Stock HEXO a Buy in 2020?

The cannabis industry was supposed to be unstoppable in 2019, with Canada launching derivatives and a number of U.S. states delivering strong organic growth. But reality hadn’t come close to matching the perception by the time the curtain finally closed.

Following a red-hot first quarter that saw more than a dozen pot stocks gain at least…

70%, cannabis companies finished the remainder of the year in a steep nine-month downtrend. Persistent supply issues in Canada, exorbitant tax rates on cannabis in select U.S. states, and a huge black market presence have all made life difficult for North American pot stocks.

This decline also has some investors believing that marijuana stocks may now be intriguing values. This is especially true of Quebec-based HEXO (NYSE:HEXO), which shed 54% of its value in 2019 and lost more than 80% from its closing high in late April.

But is a more than halving of HEXO’s share price a reason for investors to buy into this growth story in 2020? Don’t bet on it.

To date, HEXO has been a master dealmaker

On paper, HEXO would appear to offer a lot of value for investors. For one, it’s a major producer, with at least 150,000 kilos of peak production capacity at its disposal when fully operational. Having so much output should lead to per-gram production costs that are below the industry average, as well as make it a popular company with which to forge supply deals.

Speaking of which, HEXO is the grower behind the largest provincial supply deal to date: a 200,000-kilo, five-year agreement with its home province of Quebec. This deal, presumably, accounts for a third or more of HEXO’s production over the next five years and provides some level of cash flow certainty that most other pot growers don’t have.

HEXO has also been a stud in the dealmaking department. The company wound up acquiring Newstrike Brands to bolster its production and has worked out a two-year agreement with The Valens Company to have an aggregate of 80,000 kilos of hemp and cannabis biomass processed for resins and distillates that’ll be used in derivatives. As a reminder, HEXO has more than 600,000 square feet set aside solely for processing and manufacturing.

It also formed a joint venture (known as Truss) with Molson Coors Brewing in 2018 that recently launched a line of cannabis-infused nonalcoholic beverages. HEXO has gone all-in on high-margin derivatives, and has eagerly awaited the December 2019 launch of these alternative consumption products.

Sounds like a high-growth, feel-good story in the cannabis space, right? Well, not so fast…

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