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A Good CBD Stock for Cannabidiol Investors

It’s been a smidgen over three years ago since we penned our first article on investing in marijuana stocks, primarily meant to warn investors about cannabis stock scams and point them in the right direction when it comes to investing in marijuana stocks. In short, don’t bet the proverbial farm on an investment theme that bears a great deal of regulatory risk, not to mention volatility, as a crazed herd of newbie investors pile in. As we continued to write about cannabis stocks and the overall cannabis theme, thousands and thousands of investors began their first foray into investing, most likely completely ignoring our warnings about the importance of prudent investing before speculative investing. It was almost as bad as the ICO craze.

Now that the dust has settled, we’re starting to see large corporations make sizable investments in some of the bigger industry players. We also continue to see a great deal of risk – in other words, volatility – in stocks like Aphria, a drama that we wrote about a few weeks back. We’re also seeing more venture capital flow into the space, and more publicly traded stocks are starting to appear, offering investors some exposure to the cannabis theme. We’re also seeing a lot more interest in cannabidiol (CBD) products since it’s now legal to grow hemp in the United States, something we covered in a recent article titled “It’s Legal to Grow Hemp in the USA. What That Means.

When it comes to CBD, it doesn’t get you high, so we can’t say it’s something we’re dying to get our hands on. On the other hand, some people are speculating that it’s a market that could be potentially bigger than the market for cannabis products that do get you high. Now that’s something we can get interested in, and one attractive CBD stock we came across recently is Charlotte’s Web (CWEB:CN).

A Family Affair

Click for company websiteIf you look at the trail of corporate entities and name changes, the history of the company appears to be a tad bit convoluted. Fast forward through all that and we arrive at August of 2018 when the Company successfully completed their Initial Public Offering (IPO) giving them a present-day market cap of around $1.45 billion. The first thing to note is that they’re “the market leader in the production and distribution of innovative hemp based cannabidiol (CBD) wellness products.” (According to their IPO filing, CWEB’s market share was approximately 14% based on CWEB’s 2017 revenues in an estimated $287 million hemp CBD market.)

Before we get into all that, it’s worth talking a bit about their history. We typically avoid talking about a company’s feel-good story because that and $4.50 will barely get you a latte at Starbucks these days. We’re going to make an exception though for Charlotte’s Web, because you won’t see this sort of corporate structure very often.

Josh, Joel, Jesse, Jon, Jordan, Jared and J. Austin

Josh, Joel, Jesse, Jon, Jordan, Jared and J. Austin – Source: Charlotte’s Web

“We’re not Mormons and we’re not Catholics, we’re just incredibly fertile,” says the company’s Chairman who comes from a family of 11 siblings, the majority of whom are helping him run the company. That’s right, the company is being led by “The Stanley Brothers” who had to decide between putting together a traveling Christian rock band or getting into the marijuana business. They got their start in marijuana when they began researching alternative cancer treatments after their uncle was diagnosed with pancreatic cancer in 2008.

In 2011, the brothers met a little girl named Charlotte who suffered from a severe form of epilepsy called Dravet Syndrome, causing her to suffer through over 300 grand mal seizures a day. After all pharmaceutical options had been exhausted, medical cannabis turned out to be the answer. Charlotte’s quality of life improved, her seizures were drastically reduced, and they knew they were on to something. CNN featured the story in a documentary, a wait-list for their products grew to 15,000 families, and Charlotte’s Web products were born.

They cleared that wait-list in just under a year, and the company now has more than 22 different CBD products. There are liquid and capsule products meant to be consumed by direct ingestion, topical products in the form of creams and balms, products to put in your canine’s food (much easier than trying to get Cesar Millan to come over), and a whole pipeline of new products in the works with five to seven of them hitting the market by the end of 2019.

A CBD Product That Sells Itself

Marketing folks would kill for a company story like this one, and Joel recognizes that when he says, “there is no amount of marketing dollars that can replace a group of people that truly care about helping others.” (Marketing people would also kill for a company Chairman who says things like that without being told.) In yesterday’s article on fake news, we talked about “negative brand perception.” The opposite of that is positive brand perception, and the Charlotte’s Web story just writes itself.

As a result of their authenticity and caring approach to the way they conduct business, they’re reaping the rewards. With 337 tons of hemp produced in 2017, Charlotte’s Web is the number one brand by market share, with products available at more than 3,600 retail locations.

Charlotte's Web numbers

Source: Charlotte’s Web

When it comes to the quality of their hemp, the company claims that there are only a limited number of Cannabis strains that approach the CBD:THC ratio of CWB’s proprietary strain.

We always like to measure “cannabis stocks” by a single metric that allows us to easily perform comparables: how much product are you actually selling and is that number growing over time? In the case of Charlotte’s Web, the financials show the sort of growth we would expect to see for a company that’s the number one brand by market share. That’s quite the accomplishment considering how disparate the CBD market is. According to the company, 93% of CBD brands realize less than US$1 million in sales or less than 100 distribution points, or both.

A Good CBD Stock Looks Like This

CBD products are typically sold through five main distribution channels — dispensary and delivery services, online, smoke shops, health food stores, and doctors’ offices. Of these channels, online provides the highest profit margin because it cuts out the middleman. In the first nine months of 2018, 55% of all CWEB’s products were sold online – direct to consumer. In the world of CBD products, being able to interact directly with your customer base is uniquely important because they’re likely to be repeat customers. CBD consumers are extremely brand loyal with 23% always purchasing the same brand, 29% purchasing the same brand 75% of the time, and another 23% purchasing the same brand 50% of the time.

High margins and brand loyalty lead to financial metrics that look like these:

Note that in the above chart, 2018 revenues reflect only nine months of the year. The company expects that total annual revenue for 2018 will fall between $65 to $80 million, which means they’ve had three straight years of some very impressive revenue growth while simultaneously growing gross profits.

Lately, we’ve been seeing some murmuring in the news about how CBD products are seeing some push-back in a small but growing number of cases, something that investors refer to as “regulatory risk.” In order to mitigate such risks, companies need their revenue streams to be “geographically diversified,” in other words, you want a customer base that’s more diverse than just a bunch of bickering Americans. That’s why Charlotte’s Web is looking to build their international exposure, and the first region they plan to expand into is Western Europe. The Company expects revenue in this region to be between 10% and 15% of the Company’s consolidated revenue during the 2019 calendar year.

Conclusion

We spent a fair amount of time looking over this company’s financials, listening to what the management team has said about the vision of the company, and learning about their interesting background and motivations. We came away from that exercise feeling like this is a company we’re certainly rooting for, and if we were so inclined to make a bet on the extremely risky cannabis space, this is one stock we would take a much closer look at. If anything, it’s the authenticity of the management team that makes you feel like this closely-knit group of siblings have their shareholders’ best interests in mind and society’s as well. The speed at which they’re scaling the operation is impressive, and this isn’t the last time we’re going to be talking about this very interesting CBD stock.

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