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Charlotte’s Web: Don’t Chase the Rally, Buy the Weakness

Charlotte’s Web Holdings (CWBHF) soared over 10% yesterday on news of a distribution deal with a major grocery chain. The landmines hitting the CBD and cannabis sector stocks suggest waiting for a pullback on the stock before loading up.

Kroger Deal

On Monday, the Boulder, CO based company announced a major distirbution deal with Kroger (KR), America’s largest grocery retailer. The deal involves CWB supplying hemp CBD extract products to their online site and 1,350 stores across 22 states making Kroger the largest single distribution deal.

Based on this deal, CWB lists retail distribution that has now surpassed 8,000 locations. At the start of May, the company listed 6,000 locations. The company has now more than doubled their retail distribution network since the start of the year

The announcement is very vague on the exact timing of reaching the full 1,350 stores owned by Kroger. The large grocery chain has over 2,700 retail locations so further expansion is possible and probable.

A big reason the retail location ramp is important is that CWB only got 51% of revenues from retail locations in Q1. The company is still highly focused on their own online sales providing a massive ramp in revenues from only about $11 million in the last quarter.

A big question remains how effective these mass retailers will be at selling CBD products. The shelves could become crowded with CBD products from competitors.

CBD Problems

The cannabis sector has been under pressure in the last few months due to executive shakeups, audit frauds and FDA Warning Letters. The best time to buy the sector stocks lately has been on dips following these negative events. CWB stock surged over 10% for the day and hit $17 in initial trading. CWB is still down over $8 from the highs above $25 due to market weakness.

CWB now has a market cap above $1.5 billion and isn’t likely to rally much beyond this level with revenue forecasts for 2019 at only $120 million to $170 million. The company reported Q1 revenues of ~$22 million and these deals with grocery chains like Kroger should boost revenues substantially above the low-end target. Although, the timing of a deal in July could push the majority of sales into next year.

Analysts have CWB generating revenues of up to $350 million next year. The stock gets more reasonably priced when valued at about 4x 2020 revenue estimates.

The market is rightfully concerned about the ability of CWB to achieve the 100%+ revenue gains in 2020. Combined with website statements that the FDA has not evaluated their statements on CBD products reducing stress and helping people recovery from exercise could suggest the company gets a similar warning letter from the FDA as Curaleaf (CURLF).

Takeaway

The key investor takeaway is that Charlotte’s Web remains the best pure way to play the CBD craze in the U.S. market. The company now has the product on market and retail locations signed up for distribution. CWB should gain significant brand recognition over the Canadian companies that plan to enter the market in 2020 and beyond.

The best way to own the stock for those without a current position is to wait for weakness in the sector or stock from something specific related to the FDA. CWB needs a lot to go right in order to reach 2020 revenue targets needed to justify higher stock prices.

Overall, CWB has 2 bullish analysts in its corner over the last three months. The 12-month average price target of $25 implies about 50% in upside potential for the 'Moderate Buy' rated stock. (See CWB’s price targets and analyst ratings on TipRanks).