Stone Fox Capital

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Stone Fox Capital Advisors is a registered investment advisor founded in 2010. The firm offers portfolio management with a focus on opportunistic stocks providing secular growth trends at an affordable value. An emphasis is placed on fundamental analysis though charts are used for timing entry and exit points. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA. Invest with Stone Fox Capital's model Net Payout Yields portfolio on IB Asset Management as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here: Follow Mark on twitter: @stonefoxcapital

Cannabis Stock Charlotte’s Web Should Benefit From Market Weakness

As the cannabis market takes a hit due to fears over lost vaping revenues and the industry in general is still struggling to generate profits, Charlotte’s Web (CWBHF) is poised to benefit from the market turmoil. The market leader in CBD hemp extract products is already highly profitable and doesn’t need aggressive capital spending due to a focus of selling online and via major retail chains. The biggest risk to the Charlotte’s Web business was the ramping competition in the space and the recent market weakness should help curtail the expansion of small brands.

Major Retailer Expansion

No better example exists in the success of a company’s products is for an existing retail customer to expand the product line offered. In such a scenario, The Vitamin Shoppe (VSI) expanded the Charlotte’s Web product line to include selling CBD gummies. The specialty retailer already sold CBD hemp extract oil tinctures and liquid capsules.

Vitamin Shoppe has 738 stores across 45 states providing for a substantial expansion by simply flipping a switch on a new product. Charlotte’s Web recently had a similar expansion with Kroger. The grocery chain agreed to expand the number of stores carrying CBD product from the leading CBD brand to 1,350 stores placing their CBD products in over 8,000 retail locations.

Wild CBD Opportunity

The CBD opportunity in the U.S. is a very is large and set to see explosive growth through 2022, but the size of the market could vary substantially. According to the Brightfield Group, the market could grow from $0.6 billion to $21.9 billion by 2022, if the FDA sets a regulatory environment for ingestibles. The market might only reach $4.4 billion with limited consumer adoption and slow FDA actions.

(Source: Charlotte’s Web presentation)

Even the worst-case scenario has CBD related sales growing by 633% in the matter of four years. The biggest question for Charlotte’s Web is the market share obtained under both scenarios with the CBD competitive landscape growing. The number of brands in the category grew from 200 in 2017 to nearly 2,000 brands now.

Major Canadian cannabis players like Aurora Cannabis (ACB) and Canopy Growth (CGC) both planned to make major splashes in the U.S. CBD space in 2020, but the recent sector weakness could derail some of those plans. In addition, smaller players are unlikely to obtain funding in the current cannabis climate setting up Charlotte’s Web for a stronger future.

The stock has felt the hit along with the sector with Charlotte’s Web dipping back down to the $13s. The market valuation of $1.3 billion is very appealing considering the $300 million analyst estimates for 2020 revenue with strong EBITDA margins of up to 30%. Importantly, the company will be able to fund future expansion via cash flows while other sector players will need outside sources in a market where attractive financings could become increasingly limited.

Consensus Verdict

Wall Street’s analysts have been nothing but bullish on Charlotte’s Web over the past 7 months. With a return potential of nearly 67%, the stock’s consensus target price stands at $23.08. (See Charlotte’s Web’s price targets and analyst ratings on TipRanks)


The key investor takeaway is that Charlotte’s Web is correctly positioned to benefit from the surging demand for CBD products in the U.S. The recent stock market weakness had the double benefit of making the stock cheap to buy and potentially reducing the amount of competition in the sector going forward allowing Charlotte’s Web to obtain better brand awareness and market share in a suddenly crowded space.


Disclosure: No position.

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