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The Farm Bill's passage should allow this $2 billion pot stock to move to a more reputable U.S. exchange.
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The past year has been all about transformation when it comes to the legal marijuana industry. Having previously been considered a taboo industry, this vision was firmly placed into the rearview mirror with the legalization of recreational pot in Canada as of Oct. 17, 2018.
In addition to Canada becoming the first industrialized country in the world to approve adult-use weed, we witnessed a handful of U.S. states legalize marijuana in some capacity, as well as the U.S. Food and Drug Administration approve its very first cannabis-derived drug. At every turn, whether it be a massive acquisition or a jaw-dropping initial public offering, marijuana and pot stocks continue to transform the way the cannabis industry is viewed.
Image source: Getty Images.
Arguably one of the biggest trends in recent months is the uplisting of marijuana stocks from the over-the-counter (OTC) exchange to either the Nasdaq or New York Stock Exchange (NYSE). In total, seven pot stocks have uplisted to a major exchange.
There are a number of reasons uplisting makes sense. For starters, it means listing a cannabis company side by side with hundreds of time-tested business models. This adds validity to the marijuana business model and can help assure Wall Street and investors that the cannabis industry isn't going anywhere.
Additionally, listing on a major exchange improves volume-based liquidity, which can help reduce volatility, and is a means of rolling out the red carpet for Wall Street. You see, investment firms may not be willing to initiate coverage and/or invest in stocks listed on the OTC exchange. By moving to the Nasdaq or NYSE, this objection is overcome, putting the spotlight on the select few pot stocks that have made the move.
So, why don't all marijuana stocks uplist from the OTC exchange to either of the major U.S. exchanges? The answer is that there's a long list of uplisting criteria that most marijuana stocks probably wouldn't meet.
Image source: Nasdaq.
The other pretty major issue is that neither the NYSE nor Nasdaq will allow companies that deal with federally illicit substances in the U.S. to be listed on their exchanges. In other words, since companies like Canopy Growth and Aurora Cannabis aren't trying to sell dried cannabis at the state level in the U.S., the NYSE has welcomed both with open arms from the OTC exchange. This eliminates the possibility for uplisting for vertically integrated dispensary operators like MedMen Enterprises that rely on the U.S. marijuana market.
With uplisting providing quite the boost for most marijuana stocks that have made the move, the big question is, which company is next? Following passage of the Farm Bill this past December, I see only one logical choice: Charlotte's Web Holdings (CWBHF 0.02%).
At year's end, Charlotte's Web, the United States' largest manufacturer and distributor of hemp-derived cannabidiol (CBD), had its products in 3,680 retail stores and had registered its second consecutive year of operating profits. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits.
Before passage of the Farm Bill on Dec. 20, 2018, the legality of hemp and hemp-derived CBD was hit-or-miss, depending on the state. This meant that even if Charlotte's Web wanted to uplist to the Nasdaq or NYSE, it could not, because hemp plants and marijuana plants weren't distinguishable under the Controlled Substances Act. But the Farm Bill changed this by separating hemp plants from cannabis plants and legalizing hemp production and derivatives for commercial production. In effect, with one signature from President Trump, Charlotte's Web saw its primary business become legal at the federal level.
There are, of course, some kinks left to be worked out. For example, the FDA has thus far put its foot down on adding CBD to food, beverages, or dietary supplements, regardless of whether it's extracted from the hemp plant or cannabis plant. The FDA plans to review this policy and develop guidelines for CBD use as a potential food additive. But for now, the future of CBD in food and beverages is complicated.
Nevertheless, this shouldn't prevent Charlotte's Web, which boasts a robust market cap of $2 billion and a nearly $22 share price, from moving to a major U.S. exchange. The company's income statement certainly has the pedigree for a move into the spotlight. Full-year sales in 2018 grew to $69.5 million, with organic revenue growth of 74%. Furthermore, Wall Street is looking for the company, which now has easier access to more retail locations with the Farm Bill's passage, to grow sales 119% in 2019 to $152 million, then 106% in 2020 to $313.3 million.
It's an extremely profitable, high-margin business model, and it absolutely belongs on a major exchange. My expectation is that sometime soon Charlotte's Web will be headed to the Nasdaq or NYSE.