At the moment, there's simply no industry hotter than marijuana. This year alone, global sales of legal cannabis are expected to rocket higher by 38% to $16.9 billion, with legalized countries seeing higher consumer demand, and a steady stream of new markets waving the green flag on weed.
But marijuana itself is a broad-based industry, and there are numerous subcategories and niches that could grow at an even faster pace than the overall industry over the next five to 10 years. One example is the cannabidiol (CBD) products industry.
The CBD craze takes shape
CBD is the nonpsychoactive cannabinoid (i.e., it won't get you high) that's best known for its perceived medical benefits. According to a research report from the Brightfield Group, global CBD sales are expected to soar from $591 million in 2018 to $22 billion by 2022. That's a compound annual growth rate of 147%, which would run circles around the overall pot industry's growth rate over the same period.
The allure of CBD products is the aforementioned potential for medical benefits. In terms of conclusive evidence, the only certainty we have right now is that GW Pharmaceuticals' (GWPH) Epidiolex, an oral CBD formulation, works to treat two rare forms of childhood-onset epilepsy. GW Pharmaceuticals lead drug became the first cannabis-derived therapy approved by the Food and Drug Administration (FDA) in June 2018 after it demonstrated a statistically significant reduction in seizure frequency relative to placebo in multiple late-stage trials. In fact, GW Pharmaceuticals' work on cannabinoids may incite change, at least in the way CBD is viewed, at the federal level.
The remaining medical claims on CBD are pure conjecture at this point. However, there has been university-level evidence via studies that CBD can be beneficial for glaucoma, pain management, anxiety, and a host of other ailments.
Since they do not get the user high, products containing CBD are also more likely to be tried by consumers. This is a good thing, because CBD extracts -- and really all forms of alternative consumption options -- bear a higher price point than traditional dried cannabis flower. In this instance, a higher price point does indeed translate into a juicier margin for CBD companies.
Three CBD stocks for investors to consider
So, what's the smartest and safest way to play the CBD craze, you ask? Here are three companies -- one director player, one ancillary player, and one at an arm's distance -- that could be worth a closer look.
Check out the latest earnings call transcripts for CVS and other companies we cover.
Charlotte's Web Holdings
The most direct (but still reasonably safe) way to play the burgeoning CBD industry is by considering hemp-derived CBD producer and distributor Charlotte's Web Holdings (CWBHF 1.13%).
I believe it's important here to note the distinction between cannabis-extracted CBD and hemp-extracted CBD. With the passage of the Farm Bill in December, hemp and hemp-derived CBD products became legal throughout the United States, with the exception of adding any sort of CBD to food and beverages, which are still regulated by the FDA. Cannabis-derived CBD is still illegal at the federal level. What Charlotte's Web has been and will continue to be focused on is hemp-derived CBD oils.
Before the Farm Bill's passage, Charlotte's Web had its hemp-based CBD products in more than 3,600 retailers in the United States. Following its passage, the company should have no trouble increasing its retail presence. Nor should it have any issue passing along higher price points to consumers or retailers given the buzz surrounding CBD products.
Despite being a direct player, Charlotte's Web is considered safe in my view because it's one of just a small handful of pot stocks that are profitable on an operating basis. This is a company that's been profitable without the assistance of one-time benefits for more than a year, and appears to be on track for sales growth of more than 120% in 2019. It's unquestionably the easiest way to give your portfolio CBD exposure.
Then again, a middle-of-the-road approach might be more appealing to some investors. If that's the case, I'd steer you toward taking a closer look at KushCo Holdings (KSHB).
KushCo is probably best known for providing packaging and branding solutions to more than 5,000 marijuana growers worldwide. Yes, this would include packaging dried cannabis flower, but it may also entail packaging and branding solutions for alternative consumption options, including those that contain high concentrations of CBD. Although KushCo isn't the only company involved in the packaging space for the weed industry, it's easily the most recognized, and it's been ramping up agreements with major producers to supply packaging and branding solutions for years to come.
In addition, KushCo's acquisition of Summit Innovations in 2018 moved the company into the production of hydrocarbon gases and solvents. The former are used for the production of cannabis oils, whereas the latter are necessary for the manufacture of cannabis concentrates. The real allure here would be the now-crucial role KushCo plays in supplying hydrocarbon gas for oil production. Cannabis oils are mostly rich in CBD, and in the early going, they've been incredibly popular with consumers throughout North America.
The icing on the cake here is that, as an ancillary player, KushCo is racking up quite a bit of revenue. According to Wall Street, this is a company angling for more than $200 million in sales by 2020. That's pretty inexpensive when you consider that its current market cap is only $505 million.
Lastly, should you want to dip your toes into the pond, but would prefer waiting for the temperature of the water to cool down a bit before diving in, you might consider America's largest pharmacy chain, CVS Health (CVS -1.52%), as a possible safe CBD stock to buy.
To be clear, we're talking about a completely different spectrum of CBD play between Charlotte's Web and CVS Health. Charlotte's Web essentially relies on CBD for every cent of its sales, whereas CVS Health will only be generating a small fraction (far less than 1%) from CBD product sales. CVS Health recently announced that it would begin selling CBD products, including creams and other topicals, in approximately 800 locations in eight states. But keep in mind that CVS stores typically have thousands of front-end and over-the-counter products for sale, on top of pharmacy revenue.
Make no mistake about it, if you're buying into CVS Health, you're primarily buying into a long list of growth initiatives beyond just CBD products being in its stores. For example, you're counting on an aging U.S. population (i.e., boomers) to need higher-margin prescription medicines in the years and decades to come. You're also expecting significant cost synergies from the recently-closed acquisition of health insurer Aetna, as well as an organic growth acceleration courtesy of Aetna. But you're also betting on improved foot traffic with CBD products in stores.
With CVS Health's forward price-to-earnings ratio at a decade low, it looks to be a safe way to gain minimal exposure to the CBD movement.