We have all heard the pitch: The CBD market is set to grow by some ungodly CAGR over such-and-such period of years ahead. It’s “sliced bread” multiplied by “the wheel” to the power of “fire”.
But, as is always the case, capital markets swing around a basic core of reason with some enthusiastic fat tails. That leads to a state of overshooting and undershooting, which really accounts for the sense of opportunity we feel when we think about strategic investing as an art.
The upshot of all of this? CBD stocks got way ahead of themselves last year and earlier this year. Now, after a few months of pain, they have probably gotten behind the curve, and it’s a perfect time to start to sift through the rubble and figure out how to best position for the next leg because, at the end of the day, the big market opportunity is still very much in play. In fact, according to analysts at the Brightfield Group, it’s more potent than ever due to the increasing appearance of CBD products on the shelves of major well-branded physical chain retail stores.
According to their research, the CBD products market in 2019 will grow 69 times as fast the global video game market, 60 times as fast as the global robotics market, and 26 times faster than the global cannabis market. In other words: Yes, CBD stocks got a bit ahead of the curve, but it’s still perhaps the most remarkable investment opportunity on the planet right now. And that’s something that will end up having the last laugh on the charts.
So, given all of that, we have 5 stocks that may be best positioned to offer the most interesting opportunities to benefit from the current market situation: Aurora Cannabis Inc (NYSE:ACB), Charlotte’s Web Holdings Inc (OTCMKTS:CWBHF), GD Entertainment and Technology (OTCMKTS:GDET), Canopy Growth Corp (NYSE:CGC), and Tilray Inc (NASDAQ:TLRY).
Aurora Cannabis Inc (NYSE:ACB) has been pining to gain access to a leadership position in the CBD market – a fact which should become undeniably clear from its recent M&A activity.
Back in 2017, the company invested in Hempco, a Vancouver-based maker of hemp-based foods, hemp fiber, and hemp nutraceuticals. Hempco also supplied Aurora with raw hemp for extracting CBD. ACB bought the rest of Hempco 3 months later. That segment still powers Aurora’s CBD push in the North American market.
The company next acquired Agropro, Europe’s largest producer, processor, and supplier of certified organic hemp and hemp products. At the same time, Aurora acquired Agropro’s sister company Borela, which processes and distributes organic hulled hemp seeds, hemp seed protein, hemp flour, and hemp seed oil.
Just after that, in late 2018, Aurora acquired ICC Labs, which claims leadership in the South American hemp CBD market, with a large-scale extraction facility that can process 150,000 kg of CBD feed annually.
In other words, Aurora has moved through the M&A channel to digest and assimilate leaders in the North American, EU, and South American CBD markets over the past thirty months. This should really come as no surprise given that the company is one of the most widely diversified players in the cannabis space due to its powerful strategic investments.
In addition, the company has demonstrated rapid organic growth and strong execution on strategic M&A, which to date includes 15 companies – MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland (formerly Pedanios), H2 Biopharma, Urban Cultivator, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, Anandia Labs, HotHouse Consulting, Agropro, Borela, and the pending acquisition of ICC Labs.
We would also note that the company has invested in and established strategic partnerships with a range of leading innovators, including: The Green Organic Dutchman Holdings Ltd. (TSX: TGOD), Radient Technologies Inc. (TSXV: RTI), Hempco Food and Fiber Inc. (TSXV: HEMP), Cann Group Ltd. (ASX: CAN), Micron Waste Technologies Inc. (CSE: MWM), Choom Holdings Inc. (CSE: CHOO), Namaste Technologies Inc. (TSXV: N), Evio Beauty Group (private), Wagner Dimas (private), CTT Pharmaceuticals (OTCC: CTTH), and Alcanna Inc. (TSX: CLIQ).
However, just drilling down into its core cannabis production operations, Aurora Cannabis Enterprises Inc, trumpets itself as “one of the world’s largest and leading cannabis companies” and a licensed producer of medical cannabis pursuant to ACMPR.
We would expect expansion on the way given the inflow of investment capital. But, at present, the Company operates a 55,200 square foot, state-of-the-art production facility in Mountain View County, Alberta, known as Aurora Mountain, is currently constructing a second 800,000 square foot production facility, known as “Aurora Sky”, at the Edmonton International Airport, and has acquired, and is undertaking completion of a third 40,000 square foot production facility in Pointe-Claire, Quebec, on Montreal’s West Island.
Aurora Cannabis Inc (NYSE:ACB) managed to rope in revenues totaling $98.9M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 416.7%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($362M against $436.4M, respectively).
Charlotte’s Web Holdings Inc (OTCMKTS:CWBHF) is the leading pure-play in the CBD space among all investable CBD companies on the publicly traded markets by current measures in terms of exposure and market penetration. However, it likely stands to be overtaken in that status just as a matter of capital scale. But that doesn’t mean the company isn’t executing on its opportunities.
One point that stands out to us is recent commentary from Stansberry’s Tom Carroll: “It’s the leader in CBD products, with a five-year lead on everyone else. It has strong brand recognition and great intellectual property on its seeds and strains. And it has far less regulatory uncertainty than most other companies. I think this is a ‘must own’ in the sector.”
So far, as each phase of the CBD boom has unfolded, Charlotte’s Web has managed to further entrench itself in a leadership role in terms of distribution footprint and branding reputation. That’s an execution story with some legs and it continues to demand a corresponding level of attention from investors seeking exposure to the thematic premise of CBD.
Charlotte’s Web Holdings Inc (OTCMKTS:CWBHF) develops and distributes hemp-based cannabidiol (CBD) wellness products. Its products include CBD hemp oils, capsules, topicals, and pet products that feature CBD hemp oil extracts.
The company sells its products online as well as through distributors, and brick and mortar retailers. Founded by the Stanley Brothers, the company’s premium quality products start with proprietary hemp genetics that are responsibly manufactured into whole plant hemp extracts naturally containing a full spectrum of phytocannabinoids, including CBD, terpenes, flavonoids and other beneficial hemp compounds. Industrial hemp products are non-intoxicating.
The company’s current product categories include tinctures (liquid products), capsules, topical, as well as pet products. With CBD forecasts boiling over as US mainstream consumer adoption accelerates, the stock is set to potentially benefit if the company is able to effectively take advantage of its core opportunities. It has established a reputation for execution thus far, but it doesn’t have a moat around that success, so its leadership role is vulnerable to usurpation from smart upstarts below the radar, such as GDET, which we discuss below.
Charlotte’s Web Holdings Inc (OTCMKTS:CWBHF) pulled in sales of $33.5M in its last reported quarterly financials, representing top line growth of 50.6%. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($67.2M against $18.3M).
GD Entertainment & Technology Inc. (OTCMKTS:GDET) operates in two basic segments: cryptocurrency mining and CBD-based products. Both segments are currently doing real business and will likely contribute to significant revenue growth over the next 3-month and 12-month periods based on company data.
The company’s CBD segment consists of its wholly-owned subsidiary, The Greenery (TheGreeneryCo.com), which has successfully cultivated a large and fully paid-for inventory of premium quality CBD-based products targeting both the human and pet CBD markets. The reason this stock is so interesting is that it appears to be right at the point of greatest potential for upside given that it has built up assets in-house successfully, and is about to aggressively go to market to monetize those assets.
The Greenery has a popular Honey Hemp CBD recipe that has evolved in partnership with a local “homegrown” honey supplier located in Florida. This is a strong differentiator from a marketing standpoint. The company is also targeting the CBD-for-pets market with a strong push.
GDET recently announced that it had placed a major order with their industry leading manufacturer to restock current inventory and expand its entire product catalog. Management just recently took delivery of both the cosmeceutical and pet wellness lines and is now awaiting a shipment of the all-new organic CBD gummies for the active lifestyle product line.
The Honey Hemp line is the Company’s first product in the food and beverage category and aims to target audiences both in the retail and commercial space. The Greenery team is currently working on launching the product to be available for purchase on the company’s website, www.thegreeneryco.com and through its wholesale program.
The CBD dog treat line is the second product to showcase the company’s new design initiative after hiring Juicyorange, a major Manhattan based digital creative agency.
We are also particularly on alert for a potential partnership that could put Greenery products on physical chain store shelves.
There is no question that GDET is the most speculative name on this list. But it may also have the widest upside potential gap to exploit in a shift that sees risk capital move back into the CBD space in force. The company has already established a brand positioning that genuinely differentiates its product line, it has a very well-orchestrated ecommerce portal, and it has the potential to carve out a niche in specialty physical retail that may even supersede most or all of the bigger names in this group.
One other dimension that differentiates GDET in this list is diversification: it is also a fully-active and operating blockchain play. There are many potential synergies between these segments. But there is also the advantage of diversification of revenue streams, which may provide some cover if there is a further capitulatory washout in the hemp, cannabis, and CBD complex before the next leg higher in the space gets fully underway.
We would also note that the company just announced a substantial reduction in its outstanding share count to lighten the load and send a shareholder-friendly signal to the market.
Canopy Growth Corp (NYSE:CGC) has made big strides to get out in front of the CBD theme, leveraging its execution experience, venture investment arm, and overall market scale to take over as a hub in this emerging industry. When all is said and done, CGC will be a big part of the evolution of the CBD marketplace.
As we noted above, the whole hemp, CBD, and cannabis complex has been taking it on the chin in recent months in a much-needed cleansing bear market wave. It’s the deep disembowelment that refreshes the story. But, as also noted above, this story is far from over, and fresh wave is coming sooner rather than later, according to our analysis. So this is something that should probably be on the radar.
CGC managed to rope in revenues totaling $90.5M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 249.1%, as compared to year-ago data in comparable terms. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($3.2B against $372.8M).
Canopy Growth Corp (NYSE:CGC) engages in growing, possession, and sale of medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps.
According to its own materials, the company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names. It also offers its products through Tweed Main Street, a single online platform that enables registered patients to purchase medicinal cannabis from various producers across various brands.
In the company’s words, “Canopy Growth is a world-leading diversified cannabis and hemp company, offering distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms. From product and process innovation to market execution, Canopy Growth is driven by a passion for leadership and a commitment to building a world-class cannabis company one product, site and country at a time.”
This is also one of the most geographically diversified players in the cannabis space, with operations in 12 countries across five continents.
One of its most important divestitures and strategic interests is Canopy Rivers Inc., a unique investment and operating platform structured to pursue investment opportunities in the emerging global cannabis sector. The company works collaboratively with Canopy Growth to identify strategic counterparties seeking financial and/or operating support.
That could come heavily into play as it plots to secure growing CBD market share in the months to come.
Tilray Inc (NASDAQ:TLRY) has been a polarizing story in the market. The two sides of the debate surround the sense of its legitimacy on either side. The controversy boiled over a year ago when the stock underwent a short squeeze of historic proportions even as it failed to develop serious business. Now, we are seeing the other side of that dramatic coin.
The worst part of this story right now is that, according to its latest financial report, the company’s failure to perform is mostly due to massive debt servicing costs from convertible notes, which is about as bad as a narrative can get, especially in an inherently speculative market space.
All of that said, we have noticed a clear evolutionary path that has started to include a strengthening emphasis on CBD and Hemp at TLRY.
According to company materials, the company offers its products in Argentina, Australia, Canada, Chile, Croatia, Cyprus, the Czech Republic, Germany, New Zealand, and South Africa. Tilray, Inc. was incorporated in 2018 and is headquartered in Nanaimo, Canada.
The trading tape continues to be characterized by a very dominant offer, which hasn’t been the type of action TLRY shareholders really want to see. In total, over the past two weeks, shares of the stock have dropped by over 20% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities in time. But, in all of this, losses continue to pile up much faster than anticipated and the convertible debt servicing undermines that sense of a superficially strong balance sheet. And valuations, even after the dramatic declines, remain largely unattractive.
Tilray Inc (NASDAQ:TLRY) managed to rope in revenues totaling $45.9M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 371.1%, as compared to year-ago data in comparable terms. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($220.9M against $175.9M).
