Few if any industries have been as unstoppable of late as legal marijuana. Since the beginning of 2016, most pot stocks have seen their valuations rise by a triple-digit or quadruple-digit percentage, with global growth estimates for the industry soaring following the legalization of adult-use weed in Canada and multiple medical cannabis legalizations in countries around the globe.
How big could the marijuana industry become? That's really a matter of interpretation, with a variety of Wall Street investment firms projecting anywhere from $50 billion to $75 billion in sales by the end of the next decade, and the duo of Arcview Market Research and BDS Analytics calling for a compound annual growth rate of nearly 27% between 2019 and 2022.
CBD offers a compound annual growth rate of 147% through 2022
However, there's an even hotter industry that's budding from within the marijuana movement: cannabidiol (CBD). CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits, and since it won't get a user high, it's become an intriguing means of luring in new consumers who've never tried a cannabis-related product before.
According to a report from the Brightfield Group, worldwide CBD sales are expected to soar from $591 million in 2018 to as high as $22 billion by 2022, which works out to a compound annual growth rate of 147%, for those of you keeping score at home.
CBD itself can be extracted from two sources: the cannabis plant and the hemp plant. Generally speaking, hemp is a CBD-rich plant with minimal tetrahydrocannabinol (THC) content. THC is the cannabinoid that gets a user high. Meanwhile, CBD content in cannabis plants can be hit or miss, depending on the strain. CBD derived from hemp plants is legal in all 50 states following the December passage of the Farm Bill, whereas CBD derived from the cannabis plant is still considered illicit at the federal level. However, adding CBD of any form to food, beverages, or dietary supplements is a no-no since it still falls under the guidance of the U.S. Food and Drug Administration (FDA).
Four direct players in the CBD space
With this in mind, here are a handful of stocks that'll provide investors with direct exposure to the burgeoning CBD market.
Charlotte's Web Holdings
Arguably no company is more attractive from a growth perspective relative to CBD than Charlotte's Web Holdings (CWBHF 1.11%). Charlotte's Web has the highest retail market share for CBD products in the United States, with access to 3,680 retail stores at the end of 2018.
This is a company that focuses entirely on hemp-extracted CBD, meaning that in one fell swoop, via a signature from Donald Trump on Dec. 20, 2018, all of its products became legal in 50 states, with some kinks to be worked out in the near future regarding CBD as a food and beverage additive. In other words, the Farm Bill's passage rolled out the green carpet for Charlotte's Web to get its products into new retail locations. Just about the only thing missing at this point is a brand-name retail partnership.
What isn't missing are profits. Charlotte's Web has been profitable on an operating basis for approximately two years, with the company generating $69.5 million in sales in 2018, representing 74% organic sales growth. For 2019 and 2020, Wall Street is looking for a successive more-than-doubling in aggregate sales to $152 million and $313 million, respectively. Again, with Charlotte's Web already profitable, and CBD products typically yielding much higher margins than traditional dried cannabis flower, this company looks to be in excellent shape.
Another CBD stock that finds itself on the right side of the profit column is CV Sciences (CVSI 2.21%).
Like Charlotte's Web, CV Sciences retails a variety of hemp-derived CBD products in retail stores. According to its full-year results reported about a month ago, the company's PlusCBD brand of hemp products was available in 2,238 stores at the end of the year, which represents a 45% increase from the end of 2017. However, the passage of the Farm Bill has already opened up new distribution avenues for the company, which means its retail door count should expand significantly in the quarters that lie ahead.
For the year, CV Sciences tallied $48.2 million in sales, up 133% from the prior-year period, while recording net income of $10 million. The lone estimate from Wall Street is forecasting 68% sales growth in 2019 and an additional 47% in 2020, with revenue hitting $119 million by the turn of the decade.
It is worth noting, though, that CV Sciences is facing possible legal pushback from a drug it's developing that combines CBD and nicotine as a smokeless tobacco-cessation solution. Short-seller Citron Research, which often has short positions in the stocks it bashes (i.e., a financial interest), released a report in August 2018 showing that CV Sciences' combo drug patent application had been rejected by the U.S. Patent and Trademark Office. Citron alleges this was never disclosed to investors, which has been grounds for lawsuits. It's something to keep in mind if you're considering CV Sciences as a possible investment.
Medical Marijuana, Inc.
Even though it's a tiny tot, another means of gaining direct CBD exposure is by considering penny stock Medical Marijuana, Inc. (MJNA 10.64%). Of course, don't let the company's $0.066 share price trick you -- it has so many shares outstanding that it's pretty much a bona-fide small-cap with a $238 million market cap.
As the name implies, Medical Marijuana, Inc. supplies hemp-derived products to the U.S., Mexico, and other international markets. This week, Medical Marijuana announced that it had secured about 100 new retail locations during the first quarter, outpacing internal expectations. Like Charlotte's Web and CV Sciences, the passage of the Farm Bill looks to have played a big role, with CBD acceptance growing and nontraditional retailers willing to carry select CBD products.
Like its peers, Medical Marijuana has seen its top line moving in the right direction. Third-quarter revenue, reported back in November, was slightly over $16.8 million, representing a 116% year-over-year increase. Unfortunately, it hasn't been profitable on a recurring basis, but it appears to be working toward that mark. In the third quarter, the company generated an operating profit, after expenses, of $0.6 million.
Keep in mind, though, that revaluations of the company's investment portfolio can wreak havoc on Medical Marijuana, Inc.'s bottom line, and it has resulted in aggregate losses of $158 million through the first nine months of 2018.
In June, the FDA approved GW Pharmaceuticals' lead CBD-based oral drug known as Epidiolex as a treatment for two rare forms of childhood-onset epilepsy. In multiple late-stage trials, Epidiolex wound up reducing seizure frequency from baseline by between 30% and 40%, which handily topped the effectiveness of the placebo over the defined treatment range. Epidiolex is currently the only drug approved by the FDA to treat Dravet syndrome, and its only potential competitor, Zogenix, had its new drug application for fintepla refused for the time being, giving GW Pharmaceuticals a clear runway to grow sales.
How big could Epidiolex become? That's up for interpretation, but most Wall Street companies foresee $500 million to perhaps even north of $1 billion in peak annual sales. In the company's most recent quarter, we learned that GW Pharmaceuticals sold $4.7 million worth of Epidiolex in its first two months on pharmacy shelves. While it's had little trouble securing insurer coverage for its seizure therapy that costs roughly $32,500 a year, GW Pharmaceuticals is also going to need more than $4.7 million in quarterly sales to maintain a $5-plus billion valuation moving forward.