Is this the best Cannabis Stock to own right now?

Is this the best Cannabis Stock to own right now?

HEXO is one of the most underrated stocks in the cannabis sector. This previously little well known stock has gained 118% YTD and offers a great long term opportunity for investors.

The company has a ton of potential catalysts that will increase their sales, market share and valuation. With a market cap under $1.7B HEXO is also big enough to be a meaningful acquisition target but also small enough to be affordable for a large buyer.

TSX: HEXO AMEX:HEXO Market Cap: $1.6B Quarterly Revenue Growth: 1,037%

HEXO Corp. creates and distributes cannabis products. The Company offers cannabis powder, dried flowers, and oil extracts. HEXO has expanded its production capacity to 108,000 kg and a recent acquisition should bring it up to 150,000 kg in 2019.

Branded Products and Partnership Strategy The company is looking to create branded products through joint ventures with Fortune 500 companies. They currently have a partnership in the beverage industry but are planning to expand into Cosmetics, Vapes, Health and Wellness and Edibles.

In the past valuations in the cannabis industry were driven by production capacity.

The industry has shifted focus and is moving towards a marketing and sales focus as branded products offer more margin.

The Fortune 500 partnership strategy if employed correctly can give HEXO a way to sell its products through existing distribution across the world. HEXO’s first partnership is a joint venture with Molson Coors.The company plans to be the first big brand cannabis infused beverage maker with a launch of their first products forecasted for this October.

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Largest Provincial Supply Deal in History The Quebec government has agreed to have HEXO be the official supplier for the province. Quebec is home to 25% of Canada’s legal-aged residents and HEXO is estimated to have 30% market share at the moment. The 5 year deal with an renewal option is for 200,000 kilos.

Production Expansion Last month HEXO completed the largest merger between two Canadian cannabis producers in history. This deal effectively triples their cultivation space from 579,000 square feet to more than 1.8 million square feet. With the $197 million dollar acquisition of Newstrike brands the company projects to increase their peak output to 150,000 kilos per year.

Stock is undervalued compared to peers When looking at the P/S ratio investors can get an excellent valuation indicator. The company is forecasting sales of $353M in 2020 keeping with the 90 P/S Ratio this should bring their market cap up significantly.

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Canopy Growth ( $CGC ) Market Cap: $16.9B Annual Sales FY18: $117M Revenue Forecast 2020: $778M P/S Ratio: 104

Aurora Cannabis ( $ACB ) Market Cap: $9B Annual Sales FY18: $92M Revenue Forecast 2020: $829M P/S Ratio: 73

Tilray ( $TLRY ) Market Cap: $4.8B Annual Sales: $43.1M Revenue Forecast 2020: $198M P/S Ratio: 102

HEXO ( $HEXO ) Market Cap: $2.1B Annual Sales: $16.2M Revenue Forecast 2020: $353M P/S Ratio: 89

If HEXO can maintain their revenue growth rate their valuation will grow significantly.

The company is projected to sell significantly more than Tilray, a company that currently has twice HEXO’s market cap. Hexo’s modest $1.4B market cap leaves plenty of room for expansion.

Bottom Line Cannabis stocks have been exceptional performers over the last few years but many offer more downside than upside due to hefty valuations. HEXO currently offers more upside when compared to it’s large and more established rivals. With their large supply agreement, the increase in production capacity from NewStrike and the Molson Coors Cannabis Infused Beverages this company certainly looks to be one of the best Cannabis stocks to own right now.