Canopy Growth (CGC -5.92%) and Charlotte's Web (CWBHF -1.81%) are two well-known cannabis stocks with two very different strategies. Canadian pot producer Canopy Growth has been aggressive when it comes to growing domestically and internationally, while also providing customers with a broad array of products, including beverages. Colorado-based Charlotte's Web, meanwhile, has focused on the hemp-based cannabidiol (CBD) market, which is the only way to legally sell cannabis products on a federal level in the U.S.
With both stocks struggling this year, neither strategy appears to be doing too well right now. Let's take a look at which stock is in better shape today and which is the more likely investment to generate positive returns for your portfolio.
An ultracompetitive hemp market could stunt Charlotte's Web's growth
Hemp is definitely one of the safer ways to invest in cannabis. For instance, Charlotte's Web can easily send its products across state lines where hemp is permitted (it's still not entirely legal in all markets) because it's legal federally. Pot producers selling products containing tetrahydrocannabinol (THC) levels of more than 0.3% aren't able to do that.
But the legality of hemp also works against Charlotte's Web, making it an enticing option for Canadian cannabis companies looking to penetrate the lucrative U.S. cannabis market. Canopy Growth has a license to cultivate hemp in the state of New York, and fellow Canadian producer Tilray acquired a hemp company (Manitoba Harvest) last year in an effort to expand its products and services in both Canada and the U.S.
According to data provided earlier this year from the PanXchange, a commodity exchange where hemp is traded, the supply of hemp is already much more than what the industry needs. Hemp prices are falling and could continue to decline further if there's more competition in the market.
That's a concern for Charlotte's Web, where a lack of sales growth has been a problem. The company released its first-quarter results of fiscal 2020 on May 14, and revenue of $21.5 million was down from the prior-year period -- the lowest it's been since the fourth quarter of fiscal 2018. However, the company's recent acquisition of Abacus Health should help inject some sales growth into its top line; it's just a matter of whether it'll be single-digit or double-digit growth.
Another problem for Charlotte's Web is that the company's now incurred a loss for three straight quarters. Prior to that, Charlotte's Web was consistently recording profits, doing so in each of the previous four periods.
Will a new CEO be able to turn things around for Canopy Growth?
Former Constellation Brands CFO David Klein took over as CEO of Canopy Growth early in 2020. Ever since the Ontario-based pot producer let go of Bruce Linton a year ago, the hunt was on for a new visionary -- and that person is Klein.
But Klein's vision isn't so much about growth as it is about making Canopy Growth profitable. He's laid off staff and pulled the company out of some international markets, focusing on bringing expenses down and concentrating on profitable areas for the company.
However, there's still lots of work to do. The company released its year-end results May 29, and Canopy Growth capped off the year with a fourth-quarter net loss of 1.3 billion Canadian dollars ($970 million), thanks in large part to impairment and restructuring costs that drove its bottom line deep into the red. And the pot producer didn't see much in the way of sales growth, either, as its top line of CA$115.1 million was a modest 8% improvement from the prior-year period, when it reported sales of CA$106.5 million.
Unfortunately, investors aren't showing much enthusiasm for the pot stock. Shares of Canopy Growth are down about 20% this year, which is right around how the Horizons Marijuana Life Sciences ETF has performed. However, that's still much better than Charlotte's Web stock, which is down more than 50% year to date.
Despite its challenges, Canopy Growth gets the edge
Both of these companies are facing some challenging roads ahead. But Canopy Growth is the better buy for multiple reasons.
The first is that it's at least generating positive sales growth and it's got many growth opportunities to tap into, especially with beverages likely giving the company's top line a boost this year -- the pot producer shipped out its first drinks back in March.
Secondly, the company's got a key investor in Constellation Brands, which owns a 38.6% stake in the business. With that large of an investment, Constellation's likely going to provide lots of support for the cannabis company so that it can continue growing and hopefully get to the point where it's consistently generating profits.
That also leads me to the last reason, which is that the company's new CEO, Klein, came over from Constellation. As a finance-oriented person with experience working for an established, profitable company like Constellation, Klein knows the kind of culture and cost-cutting efforts the organization needs to turn things around. That's why I'm optimistic he'll be successful.
For investors who are patient with Canopy Growth, the stock could generate significant returns in a few years' time, when the business will likely be in much better shape financially.