Charlotte's Web (CWBHF 10.61%) is coming off a quarter that disappointed investors. The hemp company used to be one of the safer bets in the cannabis industry. While marijuana stocks posted mounting losses, Charlotte's Web normally turned a profit. This quarter, however, it posted a loss, sending investors into a panic, as the stock has now lost nearly half its value in just three months and is close to its 52-week low.
But investors shouldn't panic just yet; this could be a great buying opportunity. Here are five reasons why Charlotte's Web investors should hang on and why the results may not have been bad enough to justify this type of sell-off.
1. Its retail presence continues to get bigger, now in 9,000+ stores
The big advantage Charlotte's Web has over any marijuana stock is distribution. It can ship across the country, and it has a wide reach into many national brands that aren't worried about doing business with the company since hemp isn't outlawed federally like marijuana -- even though there are still places where hemp is illegal. Kroger now has Charlotte's Web products at 1,350 of its stores across 22 states. With a broad reach and being sold on shelves in big-name chains, Charlotte's Web is setting itself up for success by being able to reach more consumers than ever before.
Image Source: Getty Images.
2. Growth has led to its rising expenditures
A key reason Charlotte's Web posted a loss this quarter was that its operating expenses, in particular, general and administrative, were up significantly. The company moved into a larger office and added 36% more employees, including new hires on its leadership team. The company is undergoing significant growth, and while the costs may be high, the money isn't being wasted on high-priced acquisitions or expansions into other areas of the world that might complicate its business, which is what many marijuana companies have been up to. Investors should exercise patience with the company, as it's becoming a big name in the hemp industry, and in order to do that, it has to invest in itself.
3. Capacity is increasing significantly
The company has a new facility that it says will increase its capacity to 10 times what it is today, which will also help drive efficiencies and cost savings. The facility could start to come online as early as Q3 2020. It'll be a big step in Charlotte's Web not only improving on its margins but being able to produce more hemp and generating even more sales growth in future quarters. This is another good example of well-spent cash that's likely to translate into stronger financials.
4. It still expects growth of up to 50% next year
Sales were up 42% year over year in Q3, and Charlotte's Web doesn't anticipate that slowing down next year. CEO Deanie Elsner said projected growth for 2020 is between 40% and 50%, noting that growth depends in part on the regulatory environment -- particularly the U.S. Food and Drug Administration (FDA) and its stance on cannabidiol (CBD) in food and ingestible products. If CBD is permitted in such products, it will help Charlotte's Web sell more products at locations that won't carry them without FDA approval.
5. The stock is a relatively cheap buy
With Charlotte's Web stock crashing as hard as it has and the company's sales continuing to climb, it's now trading at just over nine times its sales for the past four quarters. That's a very modest multiple for the industry, and at their height, pot stocks were sometimes trading in the hundreds. For some added context, here is what the multiples looked at heading into earnings season:
CWBHF P/S Ratio (TTM) data by YCharts
Charlotte's Web was already a pretty good buy relative to its peers then, and it's become an even better one now.
What does this mean for investors?
While the stock may be struggling today, Charlotte's Web is doing a lot of good things that will make its future much brighter down the road. Long-term investors shouldn't be discouraged by the company's short-term struggles, as the company is already in a strong position in the industry and has created some valuable relationships with retailers across the country.
Years from now, the stock price today could look like a steal of a deal.
