About a month ago, on December 20, 2018, President Donald Trump signed the 2018 Farm Bill, heralding the official legalization of industrial hemp in the US. But even now, with industrial hemp and hemp-based CBD products legal at the federal level, there remains significant confusion over the difference between hemp and marijuana.
So, let’s clear a few things up. Contrary to popular belief, hemp is not marijuana, and marijuana is not hemp. Both, however, are varieties of the cannabis sativa species and share certain similarities.
I could bore you with a dozen details, such as how marijuana has broad leaves and hemp has skinny leaves, but frankly, that sort of information isn’t necessary, and it won’t help you make a sound investment decision.
What is important to understand is that hemp has low tetrahydrocannabinol (THC) concentration, less than 0.3% by federal law. And marijuana often has a THC concentration that ranges from 15% to as high as 40%.
From a usage standpoint, hemp is farmed and harvested for medicinal CBD-based formulas, as well as for such things as fiber for clothing, rope, paper, and insulation. Marijuana, which is also prized for its medicinal benefits, is primarily valued for its high level of THC which produces the “high” recreational marijuana users are in search of.
The bottom line is while both hemp and marijuana are members of the Cannabis Sativa family, their biological structures are different. And from a legal standpoint, the fact that hemp has a THC concentration of less than 0.3% is what makes it legal in the US, while its close cousin, marijuana, remains persona non grata at the federal level.
The Investment Case for Hemp-Based CBD
Even before the 2018 Farm Bill legalizing hemp and hemp-based products at the federal level, cannabis experts at the Brightfield Group were publishing incredible growth expectations for the hemp-derived CBD market.
Those analysts have gone on the record stating that they believe the hemp-based CBD market is going to grow from an estimated $591 million market in 2018, to $22 billion in 2022. According to the Brightfield Group, this exponential rate of growth will be driven by an explosion in distribution channels and wide-scale adoption (of CBD products) by chain retailers.
Two months before President Trump signed the Farm Bill into law, the Cannabis Business Times ran an article highlighting the growth that the hemp-based CBD market could experience as a result of this piece of legislation. Remarks made by Lex Pelger, science director at Bluebird Botanicals, to the Cannabis Business Times’ sister publication, Cannabis Dispensary, were included in the article.
Here’s what Pelger had to say on the prospects for hemp-based CBD:
“Once the -- if the -- hemp farm bill passes in the next month or two, that’s going to be the nitroglycerine that really ignites the hemp industry, because it’s furthering and solidifying the protections from the first 2014 Farm Bill. That’s going to give a lot of coverage to the bigger players who have been a little bit nervous to get in.”
Pelger went on to say this:
“There are so many different types of wholesale retailers where a CBD product could appear that once all of them start flooding into this market, it’s really going to be an amazing thing to see. It’s amazing to see the growth that’s happened already, and it’s only the organizations getting in that have some bravery to them.”
The bottom line is with the Farm Bill signed into law, the investment door into the hemp-based CBD industry has been blown wide open. All that’s left now is for investors to begin researching and educating themselves on their investment options.
Putting Money to Work
I’ve identified several promising companies making a name for themselves in the hemp-based CBD industry over the past few months. But if you believe brand awareness and reputation are as important in the hemp and cannabis marketplace as they are in the beverage, retail, and clothing industries, then Charlotte’s Web Holdings Inc (CNSX:CWEB) (OTCMKTS:CWBHF) should be your go-to name in the space.
Charlotte’s Web was initially formed on December 8, 2013, under the name Stanley Brothers Social Enterprises LLC, but that name was changed to CWB Holdings, LLC. on June 19, 2015, and then converted to CWB Holdings Inc (switching from a limited liability company to a corporation) on December 30, 2015.
A final name change was set in motion on July 12, 2018, only weeks before the company’s initial public offering on August 30, 2018, when Charlotte’s Web Holdings Inc was created to indirectly acquire and hold all the shares of CWB Holdings Inc.
Name changes aside, what sets Charlotte’s Web apart from other hemp-based CBD companies is brand recognition, customer loyalty, and a growing distribution network.
Charlotte’s Web, under the leadership of President and Chief Executive Officer Hessaam Moallem and company co-founder and Chairman Joel Stanley, has built the #1 brand by market share in the hemp-derived CBD market. And they’ve accomplished this by expanding the distribution network to 3,680 retail locations, planting 300 acres of hemp in 2018, and harvesting 675,000 pounds of raw hemp in 2018.
And according to the Understanding Cannabidiol report published by the Brightfield Group in conjunction with HelloMD, Charlotte’s Web is the #1 preferred brand among hemp-based CBD consumers.
Brand loyalty alone can only carry a company so far. Because without a sophisticated distribution network, in time, customers will shift to more readily available products and become loyal to them.
Charlotte’s Web products are currently sold in a direct-to-consumer format via cwhemp.com, and in 3,680 -- and growing -- retail locations across the US. And with the 2018 Farm Bill removing the risk for retail distribution, the company is already in active discussions with national retail chains to expand an already impressive distribution network.
A Strong Financial Foundation
When Charlotte’s Web reported third-quarter 2018 financial results on November 27, 2018, it’s fair to say the investment community was pleased with the company’s first report as a public company.
The company reported:
- Revenue of $17.7 million, compared with $11.3 million in the year-ago period, representing organic revenue growth of 57%.
- Gross profit of $12.3 million, compared with $8.2 million in the year-ago period, representing year-over-year growth of 50%.
- Adjusted EBITDA increased 23% to $5.4 million.
- Net proceed of $71.5 million were collected from the company’s initial public offering.
Here’s what Hess Moallem, Charlotte’s Web’s President and Chief Executive Office had to say about his company’s results:
“During the third quarter, we completed a successful initial public offering and private placement that generated significant capital for the Company that is being deployed to accelerate our growth in the hemp-derived CBD sector. Product portfolio sales increased year-over-year during the quarter with human nutrition product and animal nutrition products growing by 42% and 153%, respectively, with the pet line growing from a smaller base as it was just launched in February of last year. In general, broader consumer awareness of the benefits of cannabinoid, namely cannabidiol (CBD), and whole plant hemp extract is driving increased uptake in both our retail channels and within our e-commerce platform.”
A Stock in Need of a Catalyst
Charlotte’s Web’s stock has struggled to generate meaningful upside momentum since coming public at the end of the third quarter in 2018. But that doesn’t mean the stock should be assumed to be in a bear trend or broken.
I believe the market is waiting for the company to report fourth-quarter 2018 results.
If it reports revenue growth greater than 40% to 50%, gross profit margins between 75% and 80%, and the stock continues to attract buyers between $12.50 and $13.50, I’d expect to stock to break-out to the upside and trade to new all-time highs.
From a technical standpoint, investors do not want to see Charlotte's Web begin trading below $12 to $12.50.
The bottom line is Charlotte’s Web was in a strong financial and industry-leading position before the passage of the 2018 Farm Bill. And today, with the removal of legal roadblocks at the federal level, the company is in a perfect position to expand its distribution network, acquire new customers, and grow from niche player in the natural health food market, into a significant player on the shelves of the country’s largest retailers and mass market grocery/drug stores.
At the time of publication, Bob Byrne had no positions in the stocks mentioned.