Few industries offer the near- and long-term growth potential of the marijuana industry. Having generated an estimated $12.2 billion in global sales in 2018, the duo of Arcview Market Research and BDS Analytics foresees global pot sales spiking to $31.3 billion by 2022. Investment bank Cowen Group, the weed industry's biggest cheerleader, is even more aggressive with a call for $75 billion in annual sales by 2030.
Yet, in spite of this rapid growth, yours truly hasn't jumped on the opportunity to invest in pot stocks. Having seen many industries with rapid growth potential come before it -- e.g., genomics, 3D printing, internet business-to-business commerce, and so on -- I've gained the knowledge that it often takes years for these companies to mature. Although I've missed out on some early-stage gains, I'm content avoiding the wild vacillations in the interim.
But that all changed on Wednesday, March 20, when I became the owner of my very first pot stock... sort of.
America's largest pharmacy chain is dipping its toes into the cannabis pond
Following the closing bell, the largest pharmacy chain in the U.S., and the most recent addition to my long-term portfolio, CVS Health (NYSE:CVS), announced that it had entered into a deal with vertically integrated multistate cannabis operator Curaleaf Holdings (OTC:CURLF) to provide it with cannabidiol (CBD)-based products, including creams, lotions, and sprays, in about 800 stores in eight U.S. states. CBD is the nonpsychoactive cannabinoid (i.e., it won't get you high) best known for its perceived medical benefits. It's worth noting that CVS Health will not be selling, nor will Curaleaf be providing, CBD products in food and beverages, which are still under the strict regulation of the Food and Drug Administration.
The partnership includes CVS offering CBD products in:
- California, the largest cannabis market in the U.S., with $11 billion in forecasted sales by 2030.
- Colorado, the very first state to sell recreational marijuana, beginning in January 2014.
- Illinois, which is currently discussing the idea of adult-use legalization.
- Alabama, which is about as far from legalizing medical and recreational weed as you could possibly expect.
This is a broad assortment of states, and it places Curaleaf's CBD products in about 8% of CVS Health's worldwide pharmacies.
More so, it further enhances CVS Health's promotion of its wellness program. For those who may not recall, the company discontinued selling tobacco products in its stores in October 2014, since tobacco products aren't conducive to good health. Then, in 2017, the company introduced health and wellness vending machines designed to sell over-the-counter health products, popular personal care products, and healthier snacks. Now, with the move into CBD products, CVS is remaining committed to its wellness initiative of offering consumers as much choice as possible.
CVS Health won't be the last to make this move
Although CVS Health is the first brand-name pharmacy chain to make this move, it's unlikely to be the last. The passage of the farm bill in December wound up legalizing hemp and hemp-based CBD production throughout the U.S., with the exception of adding CBD to food and beverages. Hemp is often rich with CBD, while containing only trace or small amounts of tetrahydrocannabinol (THC), which is what gets a user high.
Prior to President Trump signing the farm bill into law, hemp-derived CBD producers and distributors like Charlotte's Web Holdings were doing just fine. Charlotte's Web already had a presence in nearly 3,700 stores throughout the U.S., and the bill's passage should create an easier path for the company's CBD products to find their way into new doors.
We're also witnessing nontraditional retailers carrying CBD-based products, which is a trend we can expect to continue. In January, designer shoe retailer DSW (NYSE:DBI) announced that it had entered a deal with Green Growth Brands (OTC:GGBXF) to sell CBD-rich topical creams, muscle balms, and body lotions at 96 of its U.S. stores. This move came after DSW tested Green Growth Brands' Seventh Sense line of products in 10 of its stores and saw 74% of the product it tested sell over a 10-week trial period. Although a shoe retailer like DSW carrying cannabis products might sound odd, it's a win-win for everyone involved. CBD products take up minimal display space, bear higher price points, and are high margin for both DSW and Green Growth Brands.
CVS Health may be setting the tone among pharmacies, but it's not going to be the only healthcare company that isn't a dispensary to carry a variety of CBD products.
Another feather in the cap for CVS Health
Long story short, I consider CVS Health's logical move into the CBD space as yet another feather in the cap of America's leading pharmacy provider.
In recent weeks, CVS Health has come under pressure following the release of its fourth-quarter operating results and the issuance of its 2019 guidance, which didn't measure up against Wall Street's expectation. Potentially lower drug reimbursements, along with slower cost synergies from the CVS' $70 billion acquisition of Aetna, are weighing on the company.
However, Wall Street appears to be overlooking the long-term cost-savings, possibility for improved customer loyalty, and stronger organic growth that Aetna brings to the table. By next year, the combination with Aetna should lead to $750 million in annual cost synergies. Furthermore, since front-end pharmacy sales are traditionally an organic growth drag on CVS, the addition of Aetna, which typically grows at a faster rate than CVS' combined front-end and pharmacy sales, should help boost the company's organic growth rate. Also, with the addition of Aetna's roughly 23 million members, CVS could create incentives to keep these folks within its pharmacy network.
All told, at just eight times forward earnings, CVS Health is as cheap as it's been in a decade. The addition of CBD to its stores is simply the icing on the cake that could boost traffic to the nation's largest pharmacy chain.