On today’s TSX Breakouts report, there are 45 stocks on the positive breakouts list (stocks with positive price momentum), and 25 securities are on the negative breakouts list (stocks with negative price momentum).
In recent days, several sectors have gained buying interest by investors. Bank stocks are appearing on the positive breakouts list as their share prices advance ahead of the quarterly earnings releases, and lumber company stocks have been gaining momentum given the devastating forest fire activity. In addition, many marijuana stocks have been rebounding after pulling back from peak levels reached in January. Year-to-date, the returns of marijuana stocks have varied widely, many of which have experienced steep declines. However, this cannabis company stands out from many of its peers as it has provided investors with a healthy double-digit gain, and looking forward, the average target price suggests the share price may rally 76 per cent over the next year. Discussed today is The Hydropothecary Corporation (HEXO-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Quebec-based Hydropothecary is a licensed marijuana producer that is undergoing tremendous growth as it prepares for the legalization of recreational marijuana. The company is constructing a 1-million square foot greenhouse, which is expected to be completed in December. Once completed, the company’s annual cannabis production capacity will increase to approximately 108,000 kilograms. The company is aggressively expanding its workforce, growing from 137 employees as at April 30 to its present level of more than 200 employees, and targets employing more than 500 by December. The company will supply the recreational market under the brand name HEXO, while the medical marijuana market will continue to be served under the Hydropothecary brand name. Aligning itself with its new recreational brand name, management plans to change the corporation’s name to HEXO Corporation from The Hydropothecary Corporation.
Earlier this month, the company announced it had entered into a joint venture agreement with Molson Coors Canada, a leading manufacturer of beer, to develop and manufacture marijuana-infused, non-alcoholic beverages. HEXO’s chief executive officer Sbastien St. Louis remarked on this new partnership stating in a news release, “As two leading companies who share a track record of excellent practices, as well as respect for law and regulations, HEXO and Molson Coors Canada have established a relationship built on trust, and together we will develop responsible, highquality cannabisinfused beverages for the consumable cannabis market in Canada.”
Management believes the company has a competitive cost advantage given it has greenhouse facilities and electricity rates in Quebec are low compared to its industry peers with operations located in Ontario. In the third-quarter of fiscal 2018 (the company’s fiscal year-end is July 31), the weighted average cash cost per gram was 88 cents, down from $2.06 realized during the same period last year.
In April, the company signed a five-year escalating supply agreement with the Socit des alcools du Qubec (SAQ). In Quebec, the SAQ will be responsible for the distribution of recreational cannabis through a newly created subsidiary, the Socit qubcoise du cannabis (SQDC). Once recreational marijuana is legalized, HEXO will supply the SQDC with 20,000 kilograms of marijuana in the initial year, ramping up to 35,000 kilograms in the second year and 45,000 kilograms in the third year.
In management’s discussion and analysis report released at the end of June, the company expanded on its growth objectives stating, “Based on the current agreements signed between the SQDC and five other licensed producers, we obtained the highest Year 1 volume, representing approximately 34 per cent market share within the province of Quebec, and we are aiming to remain the largest supplier in subsequent years. Our top priority in Year 1 of the adult recreational market is to serve the Qubec market and to make a strategic entry into other Canadian markets such as Ontario to position for full-scale supply to that market when production comes on line. As we execute on our relationship with SQDC and enter Ontario, we will also engage with authorities responsible for cannabis distribution and retail in Alberta and British Columbia to open additional markets for our brand.”
HYDROPOTHECARY
$4.86+0.77 (18.8