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1 Cannabis Stock to Buy in 2020

By Prosper Junior Bakiny - Jan 22, 2020 at 7:43AM

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Here’s why Charlotte’s Web could bounce back this year.

I wouldn't blame you if your New Year's resolution was to stay away from marijuana stocks. After all, the cannabis sector was a hot mess last year. Consider that while the S&P 500 gained a healthy 29% during the calendar year 2019, the cannabis industry -- as measured by the Horizons Marijuana Life Sciences ETF (HMLSF -9.02%) (HMMJ -4.12%) -- was down by 35% over the same period. Pot stocks generally recorded poor financial results last year, and several company-specific scandals also weakened investors' trust in the industry as a whole. But even with all these issues, I think there's at least one cannabis company that is worth buying: Charlotte's Web Holdings (OTC:CWBHF). 

Hand drawing red arrow pointing upwards on a yellow background

Image source: Getty Images.

The leader in a fast-growing market 

Charlotte's Web is currently the leader in the U.S. cannabidiol (CBD) space, a market that is projected to grow at a frantic pace over the next few years. The company is setting itself up to be ideally positioned to profit from this growth in two major ways. First, Charlotte's Web is increasing its production capacity. The company planted 300 acres of hemp in 2018, and in 2019, that number increased by 187% to 862 acres.

Charlotte's Web is currently building a 137,000-square-foot facility in its home state of Colorado, which is a substantial improvement from its current 40,000-square-foot facility. This project kicked off in the third quarter of last year, and while it will take at least two years to complete, the new facility will help the company meet the growing demand for CBD products. To quote Stephen Lermer, COO of Charlotte's Web: "This is a time of rapid growth and transformation for Charlotte's Web, and these new facilities are necessary to support the production, warehousing, and distribution of our growing product lines and volumes."

Second, Charlotte's Web is increasing its retail presence around the country. At the end of the third quarter, the company had a presence in almost 10,000 stores, up from 3,680 stores at the end of 2018. 

Charlotte's Web's financial results haven't been particularly stellar so far. During the third quarter, the company recorded a revenue figure of $25.1 million, which remained pretty much flat sequentially. Furthermore, Charlotte's Web's $17.9 million gross profit and 71.3% gross margin during the third quarter both decreased slightly compared to the second quarter. Lastly, the company recorded a net loss of $1.3 million during the third quarter after recording a net income of $2.2 million during the second quarter.

Still, if the company continues to expand its retail presence and cranks up its production capacity as planned, it could allow Charlotte's Web to maintain its lead in the U.S. CBD market, which will eventually translate into strong financial results. 

Addressing the elephant in the room

Despite Charlotte's Web's appealing prospects, there's a major caveat that needs to be addressed. Back in November, the U.S. Food and Drug Administration (FDA) warned consumers about the potential dangers of CBD and CBD-based products in a press release. According to the health administrator, CBD can potentially cause health problems such as liver injury.

The FDA also warned that the claims regarding the alleged health benefits of CBD -- such as the claim that it can cure illnesses such as cancer -- are unproven. While this warning may cause some headwinds for Charlotte's Web, investors should remain hopeful. The regulatory landscape surrounding CBD is still a work in progress, and the FDA has yet to issue much by way of regulatory direction.

But when it does, Charlotte's Web will be ready. The company argues that its growth efforts have thus far been "dampened" due to a lack of regulatory direction from the FDA. And as the company's CEO, Deanie Elsner, said: "The opportunity for Charlotte's Web will be both the expansion of our distribution breadth across national retailers, in addition to the expansion of our portfolio depth, within each retailer. The catalyst for this significant revenue inflection point would be the FDA setting guidelines for dietary supplements."

It is also worth noting that while some companies received warning letters from the FDA for making unsubstantiated claims regarding the health benefits of their CBD products, Charlotte's Web was not one of those companies. 

Why you should buy

Although Charlotte's Web shares plunged by 30.85% last year, the company's leading position in the CBD market could help it rebound in a major way as this market continues to grow. Charlotte's Web may be down, but it isn't out yet, and the company is one of the better options for those looking to purchase shares of cannabis stocks

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Stocks Mentioned

Charlotte's Web Holdings, Inc. Stock Quote
Charlotte's Web Holdings, Inc.
$0.45 (1.78%) $0.01
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$3.49 (-4.12%) $0.15
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$2.72 (-9.02%) $0.27

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