Hemp is here to stay.
On Thursday, President Trump signed the 2018 Farm Bill into law after the legislation overwhelmingly passed both houses of Congress. One component of the bill was the legalization of hemp, which by definition is cannabis that contains no more than 0.3% of the psychoactive compound tetrahydrocannabinol (THC).
The news generated plenty of excitement among investors hoping to profit from growth in the hemp industry. But what stocks are most likely to be winners? Three that appear to be poised for success with the U.S. legalization of hemp are Charlotte's Web Holdings (CWBHF 0.23%), CV Sciences (CVSI -4.52%), and Canopy Growth (CGC -1.01%).
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1. Charlotte's Web Holdings
Charlotte's Web Holdings ranks No. 1 in market share for hemp-based cannabidiol (CBD) wellness products. The company sells several hemp-based CBD products, including capsules, gels, tinctures, and topical creams.
One reason why Charlotte's Web should profit from U.S. legalization of hemp is that the company is already growing rapidly. Sales soared 57% year over year in the third quarter of 2018. Charlotte's Web is also highly profitable already, generating earnings of nearly $8.7 million during the first nine months of 2018.
Charlotte's Web has 300 acres for the cultivation of hemp plants. It also has a 40,000-square-foot manufacturing and research facility. Charlotte's Web distributes its products to around 2,700 retail locations now, a number that is likely to grow with the legalization of hemp in the U.S.
The company achieved its past success operating under the previous Farm Bill, which allowed states to conduct pilot programs where hemp could be grown for "purposes of research." Now, though, Charlotte's Web should be able to freely market its products throughout most of the U.S.
2. CV Sciences
While Charlotte's Web claims the No. 1 spot in the hemp-based CBD market currently, CV Sciences comes in a close second place. And CV Sciences' PlusCBD Oil ranks as the top-selling brand of hemp-derived CBD oil.
Business is booming for CV Sciences. The company posted year-over-year revenue growth of 143% in the third quarter. CV Sciences' bottom line also looked great in Q3, with earnings of $3.3 million. It's not surprising that CV Sciences stock has been one of the best performers in the cannabis industry this year, with a gain of around 650%.
CV Sciences already has its CBD oils on the shelves in nearly 2,000 retail stores. Full legalization of hemp in the U.S. could open the doors to even more retailers over the next few years.
While the company's primary focus is on the consumer CBD products market, CV Sciences also is developing a drug candidate for aiding with smoking cessation. The drug, CVSI-007, combines hemp-based CBD and nicotine. It's currently in preclinical testing, but CV Sciences hopes to pursue FDA approval through the 505(b)(2) regulatory pathway, which allows is a faster process than normal drug approvals because it relies on data from an already-approved drug.
3. Canopy Growth
Unlike Charlotte's Web and CV Sciences, Canopy Growth isn't a major player in the U.S. hemp-based CBD market today. Canopy Growth doesn't have any operations in the U.S. The company isn't even profitable yet. So why is it one of the top stocks poised to benefit from U.S. hemp legalization?
Canopy Growth might not be a significant force in the U.S. hemp-based CBD market right now, but that could change dramatically in the near future. CEO Bruce Linton hinted in the company's latest quarterly conference call that it would enter the U.S. market should hemp be legalized. On Thursday, Canopy officially declared that it plans to compete in the U.S.
It won't be a stretch for Canopy to make a big splash. The company is already the biggest marijuana producer by market cap. Canopy has a sizable hemp operation in Canada. It has the necessary technology for extracting CBD from hemp. And the company has made several acquisitions to beef up its hemp operations, including a recent purchase of Colorado-based hemp researcher ebbu Inc.
Don't forget Canopy's ace in the hole, either: its relationship with large alcoholic beverage company Constellation Brands (STZ -0.37%). That relationship includes $4 billion in cash that Canopy received from Constellation. Expect Canopy (and Constellation) to quickly emerge as a leader in hemp-based CBD-infused beverages and potentially other products in the U.S. market
But how big is the opportunity?
While nearly everyone agrees that hemp-based CBD sales will take off, they don't view the size of the opportunity the same.
New Frontier Data's Hemp Business Journal projects that the U.S. hemp-based CBD market will grow from $390 million in 2018 to $1.3 billion by 2022. That's a pretty solid compound annual growth rate (CAGR) of 27.2%. However, cannabis market research company Brightfield Group estimates that the hemp CBD market in the U.S. will skyrocket to $22 billion by 2022.
The discrepancy between those two projections is, well, huge. For what it's worth, Charlotte's Web thinks that the hemp-based CBD market will increase with a CAGR of 55% from 2016 through 2021. CV Sciences forecasts hemp-based CBD industry sales of around $1.6 billion by 2021.
Just how big the actual opportunity will actually be remains to be seen. But one thing seems likely: Charlotte's Web, CV Sciences, and Canopy Growth will be there to capitalize on the growth spurred by U.S. hemp legalization.
