When President Donald Trump signed the Farm Bill of 2018, it changed the game for Cannabis. This is an extremely large piece of legislation that is only reviewed every 5 years (since 1933), and outlines the regulations governing everything from food stamps to how land can be used for environmental purposes.
The Hemp Farming Act of 2018 was a proposed law to remove hemp from Schedule I controlled substances and making it an ordinary agricultural commodity. Its provisions were incorporated in the 2018 United States farm bill that became law on December 20, 2018.
2018’s Bill legalised industrial Hemp and the production of Cannabidiol (CBD) oil from the hemp plants. Industrial hemp has over 25,000 recorded uses. You read that right. It can be used to manufacture cotton, plastic (Lego have just invested $20 million into a project to investigate building Lego blocks out of hemp), paper (cheaper to produce, using less space, and being far more environmentally friendly), biofuels, and many, many more.
As big as that is, the Hemp derived CBD market is also a monster. CBD is the new buzzword in the wellness world. Now an ingredient in cocktails, wellness drinks, and cosmetics, CBD generated over $350 million in sales in 2017. By 2022 this is expected to have grown to over $22 billion!
“This is a watershed moment for CBD in the United States.”
– Bethany Gomez
Gomez, Director of research, at the cannabis market research organisation Brightfield Group, projects a 55% compound annual growth rate, in the Hemp-derived CBD market, over the next five years.
Industrial hemp-CBD contains less than 0.3% THC, the psychoactive ingredient associated with marijuana (and getting high).
In mid-2018, the DEA reclassified FDA-approved, Hemp-based pharmaceutical CBD drugs containing less than 0.1% THC, from Schedule 1 (alongside Heroin and Cocaine) to Schedule 5 (the DEA’s lowest category, alongside prescription cough syrup).
However, the 2018 Farm Bill removes hemp from the Drug Schedule altogether. And herein lies a problem. This creates a grey area covering both legality and prescription.
Under the DEA, CBD-approved products (like GW Pharmaceutical’s Epidiolex) require a doctors prescriptions to be issued, but under The Farm Bill, no prescription at all would be required.
Does this mean that new Hemp-based CBD products that come to market, now fall under the remit of the USDA, and hence require no DEA approval? Does the farm bill completely override the DEA?
The US is now officially open for business for the production and sale of Hemp-deprived CBD pharmaceuticals and nutraceuticals, and there are three companies primed to take full advantage of what could be a $22 billion market by 2022.
In 2013, CNN featured young Charlotte Figi, who using a special CBD-based formation from the Stanley Brothers, had made a remarkable recovering from her very serious illnesses. This customised Hemp-CBD extract formed the foundation for Charlottes Web. Fast forward to 2019, and Charlotte’s Web is now the undisputed market leader in the hemp-derived CBD market.
The Colorado-based, vertically-integrated business, operates on over 300 acres of irrigated farmland, with a 50,000 square foot in-house production and manufacturing facility. They also have contract farming agreements for their hemp in Kentucky and Oregon.
With a direct to market sales platform via their e-commerce site, and wholesales distribution through their network of 2700 retailers, they were able to produce over $40 million in revenue in 2017 (an increase of 172% on the previous year) with EBITDA of $14 million.
With the #1 CBD brand in the US, a very strong management team with deep experience (and track record) in cultivation, distribution, sales and finance, Charlottes Web is in pole position to take advantage of the booming Hemp market in 2019.
Founded in 2010, this vertically-integrated business manufactures, sells and markets it’s hemp-derived CBD brands across the US. There are two distinct divisions to the company. They have a pharmaceutical division and a consumer-products division.
The pharmaceutical division focuses on the research and development of new CBD based drugs. Their current focus is on CVSI-007, a CBD-based drug intended for the treatment of smokeless tobacco. However, given they are only in preclinical stage (and hence revenue is a long way off) and do not have any associated patents for the product, this division of the company does not really hold any meaningful value to investors.
Their consumer products division however, is a whole other story. Their PlusCBD brand is sold nationally through their network of retailers and has more than 50 products in the range. These cover verticals such as beauty care, nutraceutical and vape to name but a few. Given the range of products and their current reach, this is certainly no early stage company.
For the 9 months ended September 30, 2018, CV Sciences generated $34 million in revenue (up 153% from the pervious year) with a gross profit of $24 million. Extremely profitable and well positioned to take advantage of the US Hemp market, the stock was one of the best performers of 2018, and we see no reason why it couldn’t be one of the best in 2019.
They have a great balance sheet, solid management, and if they could look to uplist from the OTC to one of the bigger exchanges in 2019, the stock could really perform well. This is not the first time we have mentioned this company, and it certainly wont be the last.
Elixinol has been one of our favourite stocks from quite some time now. We first covered it in detail in September 2018, when the stock was trading at around $1.50 and predicted there was good upside. Currently trading above $2.80 the stock has performed well, and we continue to believe there is significant upside in 2019.
Elixinol Global, which operates in the industrial hemp, dietary supplements and emerging medicinal cannabis sector, comprises three seperate companies.
Elixinol US is the main business unit. The company manufactures and distributes hemp-based dietary and skin care products to the US market and exports to another 40 countries globally (including the first ever CBD-based product to Japan in mid 2018).
With revenues of $12.5 million in the first 6 months of 2018 (up 119%), and a growing relationship with Kelsey AG in Colorado, this business should see significant growth in 2019, and is in our opinion, the only part of the company offering real value to investors right now.
The other two companies both operate out of Australia. Hemp Foods Australia sells hemp foods and seeds via both a retail network and wholesale channels. Although it produced over $2 million in revenue in the first 6 months of 2018, we are not excited about this division as see much better upside for investors in their US business.
And finally, there is Elixinol Australia, a late-stage medicinal marijuana applicant, that will be looking to produce premium medicinal marijuana for the emerging Australian medicinal market. Too early to call just how big this company might be, but we have previously valued it at ~$100 million when fully up and running.
A great performer in 2018, we continue to believe that Elixinol has huge upside in 2019, and with the passing of the Farm Bill, are very well placed to grow their US market share and capture more of the global CBD opportunities.
The Bottom Line
I will be covering each of these companies in more detail in the coming weeks, but honestly believe they are in prime position to take advantage of a booming Hemp-derived CBD market.
They all exhibit the same characteristics, being high growth companies (annual revenue increases over 100%), and have bucked the trend in 2018, showing significant share price growth in a market that fell dramatically late in the year.
Investors that get in early could really take advantages of the highs (even though you cannot actually get high from hemp).
And they told you money doesn’t grow on trees