The cannabis and CBD markets are booming in the United States. But you wouldn't know it by the performance of two of the top U.S cannabis stocks. Charlotte's Web Holdings (CWBHF -3.57%) shares have sunk nearly 60% over the past 12 months, while KushCo Holdings (KSHB) stock has plunged more than 75%.
These dismal results don't mean the future won't be bright for Charlotte's Web and KushCo, though. Which stock is the better pick now for long-term investors? Here's how Charlotte's Web and KushCo stack up against each other.
The case for Charlotte's Web
Charlotte's Web is virtually synonymous with hemp CBD. The company pioneered the market nearly a decade ago. It now claims the No. 1 hemp CBD brand in the U.S. based on market share.
For years, Charlotte's Web operated in kind of a gray area. Hemp, a type of cannabis with very low levels of psychoactive ingredient THC, was illegal at the federal level. However, the U.S. government allowed states to conduct pilot programs with growing hemp.
That changed in December 2018 with the passage of legislation that legalized hemp throughout the U.S. Retailers came knocking at Charlotte's Web's doors to carry the company's products. At the end of 2018, there were 3,680 retail stores selling Charlotte's Web brands. One year later, the total stood at over 9,000.
Charlotte's Web's sales are soaring, jumping 42% year over year in the third quarter of 2019. It's been profitable on a regular basis -- although the company posted a small net loss in Q3 as its spending rose to ramp up for commercial growth.
The company also has an accomplished leader in the consumer packaged goods (CPG) industry as CEO. Deanie Elsner took the helm of Charlotte's Web last year after previously serving as president of Kellogg's multibillion-dollar snack foods business.
There's one major obstacle that's holding Charlotte's Web back (and causing the stock to underperform): The U.S. Food and Drug Administration (FDA) hasn't established regulations for hemp-based foods and dietary supplements and appears to be taking a hard line against these products. However, a bill has been proposed in the U.S. House of Representatives that would bypass the FDA. If this legislative effort succeeds, Charlotte's Web stock would almost certainly skyrocket.
The case for KushCo
KushCo got its start supplying packaging solutions to the cannabis industry. Today, the company still is a major player in that market. But it also does a lot more, including selling vaporizer hardware and technology, providing hydrocarbons and solvents used in cannabis extraction, and providing retail services to CBD businesses. Four months ago, KushCo announced that it was expanding into the hemp commodity trading market.
Between 2016 and 2019, KushCo's revenue soared by a compound annual growth rate (CAGR) of more than 160%. Even now that the company has an established business, it expects sales to jump by close to 60% in fiscal year 2020.
Growth shouldn't be too difficult for KushCo. The U.S. legal cannabis market is projected to reach $26 billion in annual sales by 2026. And that total doesn't include the rapidly expanding hemp CBD market.
KushCo makes around 57% of its revenue in states that have legalized recreational marijuana. But the company's fastest growth is in states with legal medical cannabis markets. Currently, 33 states have legalized medical cannabis with more potentially on the way.
The biggest challenge for KushCo right now is that it isn't profitable. As a result, the company has been forced to raise capital to fund operations by dilution-causing stock offerings. KushCo also has faced a headwind from health concerns about vaping, causing its vape-related sales to plunge.
However, the company thinks that it will achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the second half of fiscal 2020 -- a key milestone toward turning a profit. The market dynamics for vape products also appear to be improving.
Better cannabis stock
I think that both of these cannabis stocks have good long-term prospects. If I had to pick only one, though, it would be Charlotte's Web. The company's already profitable, while KushCo isn't.
Keep in mind, though, that cannabis stocks are likely to remain highly volatile. If the legislative effort to legalize hemp dietary supplements fizzles out, Charlotte's Web's shares could fall even more than they already have.