Charlotte’s Web Stock – What’s a Fair Price?
For many cannabis investors, it’s their first time putting money into the stock market. They probably have no idea how badly human emotions can affect investors. It’s a topic covered perfectly in the book Reminiscences of a Stock Operator which highlights how fear – whether that’s a fear of missing out or a fear of losing money – and greed, can both lead to irrational decision making. When you consider how volatile and irrational cannabis stocks have behaved historically, it’s a recipe for disaster. Let’s take Charlotte’s Web (CWEB:CN) stock as an example.
In a previous article, we talked about how Charlotte’s Web is A Good CBD Stock for Cannabidiol Investors because they’re profitable, they have a great product, and their management team seems both authentic and competent. We stopped short of making any recommendations because we believe every investor needs to do their own due diligence and make their own decisions. If we tell you that this is a good time to open a position in Charlotte’s Web stock, we’re not going to be there to tell you when to sell. After all, losses and gains are only on paper until you decide to close your position. While we can’t tell you when to sell, we can provide some advice on how you ought to buy shares.
Market Timing Risk
Buying a stock “at the right time” means that you bought shares at the lowest price the shares will ever be at any given point of time in the future. When you buy shares and they immediately plummet, that’s difficult for most investors to stomach. Deciding when to buy is also called “market timing risk,” and one way to offset that risk is by purchasing a fixed number of shares in a stock over fixed periods of time. Using Charlotte’s Web as an example, if we want to buy 100 shares, then we might break that down into four trades:
- May 13th – Buy 25 shares
- June 13th – Buy 25 shares
- July 13th – Buy 25 shares
- August 13th – Buy 25 shares
This method is called Dollar Cost Averaging (DCA), and it helps smooth out the price that we purchase the shares at. If the share price falls, we’re happy because we can now buy shares at a cheaper cost. If shares rise, we’re happy because the shares we’re holding have gained in value. This helps take some of the emotion out of the transaction. The obvious downside is increased transaction costs. We need to pay four commissions for four purchases as opposed to one commission if we bought our entire position at once. Still, this doesn’t tell us what a “fair price” is for Charlotte’s Web stock, and one way to determine “fair price” is to see what other people are willing to pay for shares – other people who have a whole lot more resources than we do.
Charlotte’s Web Stock – What’s a Fair Price?
Just days ago, Charlotte’s Web announced that they’re selling 7 million common shares at a price of $20.00 CAD per share for total gross proceeds of $140 million CAD (about $104.3 million USD). The shares will be sold by current shareholders who are probably taking profits. (In other words, shares are not being issued which means no dilution effects and the Company will not receive any proceeds from this transaction.) The buyers of those shares are informed investors who believe that $20 is a “fair price” to pay based on the information we know today. The sellers of those shares – who ought to be equally informed – also believe that $20 a share is a “fair price” to sell their shares based on what we know today.
Consequently, CWEB stock is now trading at $20.55 which reflects a premium of 2.75%. What this provides us with is a price bottom – also called a “support level” – which means that shares are not likely to fall below $20 a share. Why? Because if shares fall below $20, then that means you’re getting a better deal than the investors who just spent over $100 million to buy shares in CWEB. Should the share price fall without any additional information being provided, then buyers are likely to step in and buy shares which will prop up the price back to where it should be. And that’s exactly what appears to have happened.
Take a look at the price action the day this announcement was made – May 9th.
The public already knew – a month ago – that Charlotte’s Web shareholders were planning to sell shares. What they didn’t know was the number of shares to be sold or the price which they would be sold at. On May 9th when this information was made known, shares plummeted to below $20 a share as a lot of 498,000 shares were sold (that’s a very large number of shares when you consider that average daily trading volume for CWEB is only 386,000 shares.) As a result, trading was suspended as exchanges sometimes do when dramatic share price action takes place. When trading resumed minutes later, an even bigger lot of shares were purchased – about 1.07 million shares – at a price of around $20 a share. The following day, shares closed at $20.55 which translates to a 5-day share price drop of more than -20%. This is a result of the share price “coming back down to earth” as we learn about a huge chunk of shares being sold for $20 a share.
Based on what we’ve gleaned from the price action above, it seems that some big buyers believe that a fair price for Charlotte’s Web stock is around $20 a share. Bear in mind that tomorrow, Charlotte’s Web could announce some additional news that might make this entire analysis obsolete. Or, some talking head at the White House could remark that “CBD is bad, mkay” and Charlotte’s Web stock could plummet another 20% on fears of regulatory risk. That’s why you should take everything we’ve said here with a grain of salt and arrive at your own conclusions.
The transaction is expected to be completed on May 15th, 2019.
Since our last article on Charlotte’s Web, things seem to be progressing well for the company. 2018 revenues were expected to be between $65 to $80 million and that number came in at $69.5 million. In their last quarterly earnings statement, CWEB gave revenue guidance for 2019 at between $120 million and $170 million. At the lowest end of that range, this translates to year-over-year revenue growth of about 72%. When guidance changes, or when revenue expectations are not met, that’s when share prices will react accordingly and exhibit volatility. The ability for a management team to correctly predict their revenues and earnings helps reduce volatility, so let’s hope they keep it up.
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