HEXO Corp is undervalued, this fund manager says

With recreational cannabis now a reality across Canada, investors are left wondering which among the country’s basket of pot companies will prosper and which will get eaten up by the competition. Bet on Gatineau, Quebec’s HEXO Corp. (HEXO Stock Quote, Chart: TSX:HEXO) becoming one of the winners, says Charles Taerk, president and CEO of Faircourt Asset Management.

HEXO shares were up almost three per cent in midday trading on Thursday, a nice bounce back after losses suffered the past two days. The company made headlines earlier this month on a joint venture agreement with Molson Coors Canada, one which will see the creation of standalone company Truss aimed at developing non-alcoholic cannabis-infused beverages for the Canadian market.

Taerk says the HEXO-Molson Coors deal didn’t receive the attention given to the splashy $5 billion investment in sector leader Canopy Growth Corp from alcohol company Constellation Brands, which in August touched off a month-long buying frenzy in cannabis companies.

“[HEXO] didn’t get the same pop that Constellation Brands and Canopy Growth got because it’s not the same format,” says Taerk to BNN Bloomberg. “What HEXO gets out of this is the IP and the product formulation. All the alcohol and drink companies are working on the delivery of effective soft drinks or alcohol replacement drinks, and so HEXO will be a beneficiary of that work that they’re doing with Molson Coors.”

Taerk says he likes HEXO’s product innovation along with its cost-efficiency as a cannabis producer —plus, the stock is way undervalued at the moment.

“It doesn’t get treated the way it should, and what I mean by that is it’s a billion-dollar-plus market cap that trades on a valuation of its forecasted earnings of around 12 times earnings,” he says. “This is very low. The companies that trade at over a billion dollars typically have a valuation metric of 30-40x.”

On the opening up of legal rec marijuana market, HEXO co-founder and chief brand officer Adam Miron said that his company knows its audience and is ready to deliver products to match with their pot expectations.

“Our goal is to become a leading global company, and to have a strong international presence,” said Miron in a press release. “To achieve this goal, we know that we need to think about more than products and prices. We must also look at our impact on the natural and social environments in which we operate.”