Shares of HEXO (NYSE: HEXO) (TSX: HEXO) closed 10.7% higher on Friday. The Canadian cannabis stock received a nice boost from MKM Partners analyst Bill Kirk, who initiated a buy recommendation with a one-year price target reflecting a 129% premium over HEXO's closing price on Thursday.
It's usually best to take analysts' calls with a grain of salt. However, it's a good idea to understand why analysts express favorable (or unfavorable) opinions about a given stock.
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In this case, Bill Kirk really likes HEXO's strategy of teaming up with other companies from outside the cannabis industry. He wrote to investors that this approach "has the best chance of creating a defensible brand," alluding to the company's strategy of partnering with companies to launch cannabis products that are "powered by HEXO."
HEXO currently only has one partner from outside the cannabis industry, Molson Coors Brewing. But HEXO CEO Sebastien St.-Louis said in the fiscal 2019 third-quarter conference call in June that HEXO is in talks with more than 60 Fortune 500 companies about potential partnerships.
Kirk also doesn't think that Wall Street is pricing in the potential for HEXO to hit its stated 2020 net revenue goal of 400 million Canadian dollars. This target doesn't include the impact from Truss Beverages, HEXO's joint venture with Molson Coors.
Analysts' opinions are one thing; actually delivering on promises is another. It remains to be seen if HEXO can actually snag another major partner and generate the level of revenue growth that the company says it can achieve. Investing in marijuana stocks comes with the constant risk of companies over promising and under delivering, as has been seen recently with Aurora Cannabis and Canopy Growth.
However, HEXO could be an exception. We should know more about the company's progress on its partnership talks and its path to CA$400 million in revenue when HEXO reports its fiscal 2019 Q4 earnings in the near future.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.