Why HEXO Stock Briefly Spiked Today

What happened

Shares of Canadian pot company HEXO (NYSEMKT: HEXO) rose by as much as 13% in premarket trading today. The spark? HEXO's shares popped in response to a strong second-quarter earnings report that hit the wires before the opening bell today, as well as yesterday's news that the company had acquired fellow pot grower Newstrike Brands for $263 million in an all-share transaction.

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Although HEXO's shares have given back most of these premarket gains since the official start of today's trading session, they remain up by 3.2% as of 10:19 a.m. EDT.

So what

While the company's second-quarter results were fairly encouraging overall, the real market-moving event here is undoubtedly HEXO's recent acquisition. With an estimated 150,000 kilograms of peak annual production capacity in the wake of this deal, HEXO is now comfortably within the top five marijuana producers in Canada. This transaction is also expected to boost the company's 2020 sales to a healthy $400 million, according to management.

Now what

HEXO hasn't gotten anywhere near the attention from investors that's been given to the top dogs in the industry, and for good reason. The quick and dirty version of the story is that probably only an elite few companies are going to survive the upcoming supply glut in the recreational and medical marijuana market in Canada.

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Prior to this deal, HEXO was most definitely on the bubble. The company, after all, had a lower-tier production capacity, and it lacked a major partnering deal — apart from its agreement with Molson Coors. With a top-notch production output, HEXO should now be able to scale up its business to capitalize on higher-margin market segments.

All in all, HEXO appears headed in the right direction from a business development standpoint. Aggressive investors, therefore, may want to consider picking up some shares of this up-and-coming pot stock soon.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

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