My Favorite Marijuana Stock Today

Marijuana stocks have been an exceptionally profitable sector this year, with the Marijuana Index up 43.1% so far. That, of course, is the North American Index. If you separate out the U.S. and Canadian stocks, here’s what you see.

While Canadian stocks peaked last year with legalization, those stocks have been lagging this year while U.S. stocks have been leading the way higher.

Canadian Cannabis Index

U.S. Cannabis Index

For a while, CBD stocks were leading the sector, as the December passage of the Farm Bill legalized hemp growing and commerce across the country and that was accompanied by a growing number of people who, through word of mouth, were encouraged to try CBD for whatever ailed them, from insomnia to anxiety, indigestion to epilepsy, arthritis to cancer. Many are even giving it to their pets!

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But more recently, the strongest stocks have been in the vertically integrated multi-state operators, a trend that recently hit a crescendo thanks to the agreement between Ontario’s Canopy Growth (CGC) and New York’s Acreage Holdings (ACRGF) that Canopy will buy Acreage, but not until it is legal to do so—which could be years from now.

Business is Booming!

Meanwhile, business in the cannabis sector continues to boom. Of the 16 companies in my well-diversified Cabot Marijuana Investor Portfolio, the average revenue growth rate in the latest quarter, relative to the previous year, was 354%. The median, for statistical fans, was 240%. This is one fast-growing sector!

And if I had to pick one marijuana stock to buy today, this is it!

My Favorite Marijuana Stock: HEXO Corp. (HEXO)

HEXO is one of the smaller Canadian marijuana companies in my Cabot Marijuana Investor Portfolio, as measured by both the latest quarter’s revenues and market capitalization, but that’s one of its attractions. While everyone and his brother has been bidding up Canopy to silly valuations, which will eventually be justified, HEXO is a relative bargain today, and HEXO stock has greater growth prospects because institutions are just beginning to climb on board.

But what does HEXO offer?

The company has a joint venture with Molson Coors that is expected to result in the distribution of cannabis beverages when they become legal in Canada later this year. They’ll be alcohol-free, at least at first.

And HEXO plans to duplicate that model by finding Fortune 500 partners in other sectors, including vapes, edibles, health & wellness and cosmetics, all of whom, ideally, will boast “Powered by HEXO.”

To that end, the company has focused on product innovation, processing marijuana into pre-rolls, oil, flower, and decarboxylated powder—which doesn’t need to be heated to be effective. Also, management has worked hard to become one of Canada’s lowest-cost producers. The company currently has more than 310,000 sq. ft. of production capacity, with another 1,000,000 sq. ft. facility now under construction. Estimated annual production capacity is 108,000 kilograms.

And on the acquisition front, HEXO has agreed to buy Newstrike Brands, which will provide HEXO capacity to produce an additional 150,000 kilograms of cannabis annually as well as distribution agreements totaling eight provinces.

In the quarter ended December 31 (the fiscal second quarter of 2019), the company saw revenue of $13.4 million, up 1,269% from the year before and up 144% from the immediately preceding quarter. Most of that growth, of course, came from the new adult-use market in Canada. Dried flower accounted for 85% of the gram equivalents sold in the quarter, down 5% from the previous quarter, while oil accounted for the rest, a trend common to the industry; oil commands higher sales prices per gram equivalent. 84% of HEXO’s sales were through the SDQC, the Societe Quebecois de Cannabis, with the remaining 16% from Ontario and British Columbia.

Last but not least, Bank of America recently initiated coverage of this upstart marijuana stock, with a price target of 10.

This chart shows why Hexo Corp. (HEXO) is my favorite marijuana stock today.Looking at the stock, HEXO bottomed in December, like most stocks, and has been advancing steadily since, outpacing in particular the big over-owned Canadian favorites in the industry. I believe this performance has come from investors diversifying beyond the big names and that the trend will continue, particularly if HEXO can lock up a partner or two in the edibles business this year.

One Caveat

Of course, it’s really not smart to buy just one marijuana stock. Surprises happen all the time, especially in fast-growing sectors like this. So the best course is to buy a diversified portfolio, and I can help with that. As I write, my Cabot Marijuana Investor Portfolio is up 51.0% year-to-date, while the Index, as mentioned above, is up “just” 43.1%. And when the going gets rough—as it undoubtedly will—I have a plan for that.

For more information, click here.

Timothy Lutts

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