The marijuana industry’s momentum in 2018 picked up in a way that we’ve simply never seen before. Aside from the fact that a record number of Americans want to see cannabis legalized, according to the newest annual Gallup poll, we witnessed Canada legalize recreational pot, the U.S. gives the green light to hemp and hemp-based cannabidiol products, and the U.S. Food and Drug Administration approved its very first cannabis-derived drug.
The point is this: The weed industry gained legitimacy like never before. Gone are the days when investing in marijuana was considered taboo. Now the legal pot industry is a valid business model that could potentially generate big gains for long-term investors. The big question being: Which pot stocks to buy?
One of the more on-the-fence marijuana stocks is Quebec-based cannabis grower HEXO (NASDAQOTH:HYYDF). Whereas 10 pot stocks were, at minimum, halved in 2018, HEXO bucked that trend and ended the year higher by 5%. But should you be looking to add HEXO to your portfolio in 2019? Valid arguments can be made from both sides of the aisle, so let’s take a closer look…
HEXO is making all the right moves and deserves a spot in your portfolio
If there were an elephant in the room for HEXO, it would be the company’s potentially transformative joint venture with Molson Coors Brewing (NYSE:TAP), announced on Aug. 1, 2018. Under the terms of the deal, Molson Coors Brewing will control 57.5% of the joint venture, with HEXO holding the remainder. The duo will be working together to research and develop a line of cannabis-infused beverages for the Canadian market.
There are a number of exciting aspects of this joint venture for both parties. Molson Coors has been steadily losing beer market share in Canada for about a decade, and this partnership foray into the high-growth cannabis business gives the company an opportunity to flip its fortunes. Meanwhile, HEXO gains access to Molson Coors’ marketing expertise and helps diversify HEXO away from a reliance on dried cannabis flower. Alternative cannabis products, such as infused beverages, almost always offer higher long-term margins and fewer pricing pressures.
Another aspect of HEXO that shouldn’t be overlooked is the company’s April 2018-signed agreement with the SQDC — the regulatory agency responsible for overseeing the cannabis industry in Quebec — to supply a minimum of 200,000 kilograms of weed over a five-year period. Under the terms of the agreement, HEXO will supply 20,000 kilos in the first year, 35,000 kilos of pot in the second year, 45,000 kilos in the third year, and a presumed 49,500 kilos and 54,450 kilos in years four and five, respectively, based on the expectation of 10% industry growth. There’s also an option for the SQDC to add a sixth year to the supply agreement.
Long-term supply deals are particularly important for growers because domestic competition is expected to be fierce, and locked-in volume and/or price commitments lead to predictable cash flow. This is an industry in which there’s little predictability, meaning…
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