Look For This High Risk / High Reward Stock to Make an Upmove in the Near-Term

We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely high risk appetite.

Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.

Penny Stock of the Day: Hexo Corp (NASDAQ: HEXO)

Today’s penny stock pick is the consumer packaged goods cannabis company, Hexo Corp (NASDAQ: HEXO).

Hexo Corp through its subsidiaries, produces, markets, and sells cannabis in Canada. It offers dried cannabis under the Time of Day and H2 lines; Elixir, a cannabis oil sublingual mist product line; and Decarb, an activated fine-milled cannabis powder product. The company offers its adult-use and medical products under the HEXO brand name. Additionally, it offers cannabis beverages under the Little Victory, House of Terpenes, Mollo, Veryvell, and XMG brands; and cannabis products under Original Stash and Up brand names.

Website:  www.hexo.com

Latest 10-k report: https://sec.report/Document/0001062993-20-005256/

Analyst Consensus: As per TipRanks Analytics, the stock’s average price target is $2.42 based on 3 Wall Street analysts offering 12 month price targets for HEXO in the last 3 months.

Potential Catalysts / Reasons for the Hype:

• News that Hexo is allowed to sell CBD products at grocery stores in California. California signed a bill to legalize certain Hemp and CBD products to be sold in regular stores.
• Leadership change, with the appointment of a new experienced CEO.
• Potential short squeeze.
• Rumors about a potential buyout at the price of $12.00.

On analyzing the company’s stock charts, there seem to be multiple bullish indications…

Bullish Indications

#1 Falling Wedge Pattern Breakout: The daily chart shows that the stock was forming a falling wedge pattern for the past several weeks. These are marked as purple color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock has currently broken out of the falling wedge pattern with high volume, indicating possible bullishness.

#2 Bullish RSI: The RSI is currently moving higher after reaching oversold levels, and is nearing 50. This is a possible bullish indication.

#3 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.

#4 Bullish Stoch: The %K line of the stochastic is above the %D line in the daily chart and is also moving up from oversold levels, indicating bullishness.

#5 Above Support Area: The weekly chart shows that the stock is trading above a strong support area, which is marked as a green color dotted line. This is a possible bullish indication.

#6 Bullish Stoch: In the weekly chart as well, the %K line of the stochastic is above the %D line and is currently near oversold levels. This indicates a possible bullish setup. There is also a bullish divergence between the stochastic and price, which is marked as pink color dotted lines. While the price formed a lower low, the stoch formed a higher low. A bullish divergence is usually the sign of a possible upmove in the near-term

#7 Oversold RSI: The RSI is currently starting to move higher after reaching oversold levels, indicating that a reversal may be imminent.

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the ideal buy level for HEXO is above the price of around $2.70. However, you can purchase half the intended quantity of shares of HEXO above the price of around $2.10. These buy levels are marked as green color dotted lines in the daily chart.

Target Prices: Our target prices are $3.50 and $5.00.

Stop Loss: To limit risk, place a stop loss at $2.25 (for entry near $2.70) and $1.50 (for entry near $2.10). Note that the stop loss is on a closing basis.

Our target potential upside is 29% to 138%.

• Entry near $2.10: For a risk of $0.60, our first target reward is $1.40, and the second target reward is $2.90. This is a nearly 1:2 and 1:5 risk-reward trade.
• Entry near $2.70: For a risk of $0.45, our first target reward is $0.80, and the second target reward is $2.30. This is a nearly 1:2 and 1:5 risk-reward trade.

In other words, this trade offers 2x to 5x more potential upside than downside.

Potential Risks / Red Flags:

1. The company has a history of net losses.
   

   HEXO – Consolidated Statements of Net Loss and Comprehensive Loss

2. The company was formerly known as The Hydropothecary Corporation and changed its name to HEXO Corp. in August 2018.
3. Despite being a loss-making company, company executives were paid millions as compensation.
   

   HEXO – Executive Compensation

4. The company had recently closed underwritten public offering for total gross proceeds to the Company of US$144,786,070.80, resulting in dilution.
5. On April 7, 2020, the company had received notification from the New York Stock Exchange that the Company was no longer in compliance with the NYSE’s US$1.00 share price continued listing standard as a result of the average closing price of its common shares on the NYSE falling below US$1.00 for a consecutive 30 trading-day period.
6. The company has a history of not implementing appropriate operational or financial strategies, resulting in its performance lagging behind peers and market averages. The executive and board compensation also had failed to focus on the right metrics, the right time frames, or the right targets.

As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!

Happy Trading!

Trades of the Day Research Team

READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.

Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.