Investors would probably struggle to find an industry with more consistent growth potential over the next decade than cannabis. Following a more-than-tripling in worldwide sales between 2014 and 2018, Wall Street has forecast the potential for a fivefold to 18-fold increase in global sales by the end of the next decade.
However, it's important to recognize that it's not just dried cannabis flower driving this growth trend. Rather, there are subcategories of product that could deliver compound annual growth rates that go above and beyond that of the broader marijuana industry. Cannabidiol (CBD) sales in the U.S. are one such example.
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The hottest growth trend in the U.S.: Cannabidiol (CBD)
Cannabidiol is the cannabinoid that doesn't get users high and is best known for its perceived medical benefits. Although CBD can be found in and extracted from the cannabis plant, it's usually found in abundance in hemp plants. Since hemp traditionally has low quantities of tetrahydrocannabinol (THC) -- the cannabinoid that gets users high -- and is considerably easier and cheaper to grow than cannabis, it's quickly become the preferred source of CBD production and extraction.
Furthermore, it's important to note that President Trump signed the Farm Bill into law in December 2018, thereby legalizing the industrial production of hemp, as well as hemp-derived CBD. Thus, while the federal government has remained steadfast in keeping marijuana illicit, it's opened the door for most anyone to carry and sell non-THC-containing CBD products (as long as they aren't food or beverage additives).
According to the Brightfield Group, hemp-derived CBD is forecast to grow into a $23.7 billion a year industry in the U.S. by 2023. This implies a compound annual growth rate between 2018 and 2023 of more than 100%! That absolutely dwarfs what's currently viewed as a very healthy compound annual growth rate for the broader cannabis industry and is a big reason why practically every major pot stock wants in on the CBD movement in the United States.
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From extractors to growers, every company wants its piece of the CBD pie
As you might imagine, there are a variety of brand-name pot stocks angling for their share of what could be a nearly $24 billion market in roughly four years.
Charlotte's Web (CWBHF -15.14%) is perhaps the best-known pure-play CBD stock. Despite CBD market share being highly fragmented, Charlotte's Web currently has the highest percentage of the U.S. CBD share and has more than doubled its retail presence in 2019 to over 8,000 stores. The company's 187% increase in hemp acreage planted (300 acres in 2018 to 862 acres in 2019), along with its landing of a 1,350-store deal with Kroger, is a big reason Charlotte's Web is already profitable and growing sales at an exceptionally quick pace.
Canopy Growth (CGC -2.11%), the largest marijuana stock in the world by market cap, is also making a play for the U.S. hemp market. Though Canopy is first and foremost focused on its domestic market of Canada, the company was awarded a hemp processing license in New York State in January and should enter more than a half-dozen states with CBD products before the end of 2020. By focusing on U.S. hemp, Canopy Growth will be able to lay down processing and distribution infrastructure on U.S. soil that could become incredibly valuable if the federal government ever changes its tune on marijuana.
Extraction-service providers like Neptune Wellness Solutions (NEPT -93.33%) have also been major beneficiaries of the push toward CBD products. Neptune is quickly becoming a go-to middleman that extracts hemp and cannabis biomass for concentrates, resins, or targeted cannabinoids that growers can use to develop high-margin derivatives products. Neptune recently completed the acquisition of SugarLeaf in the U.S., giving it the ability to process up to 1.5 million kilos per year for hemp or cannabis growers.
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Say hello to the newest CBD stock
However, there are also some surprising names that are operating in the CBD space, including the newest entrant, International Flavors & Fragrances (IFF -0.40%). This more than $12 billion large-cap company is best known for providing flavor compounds to the food and beverage industry and scents to the fragrance, household products, and beauty-care industries. Now, it'll also be known as a CBD stock.
Earlier this week, International Flavors & Fragrances (IFF) and Neptune Wellness entered into a strategic partnership to co-develop hemp-derived CBD products in the United States. Between International Flavors & Fragrances' formulation expertise and Neptune's support of consumer packaged-goods companies, this looks like a collaboration that should be beneficial to both parties. Just keep in mind that IFF is generating more than $5 billion in sales per year, so the needle is going to move far less for it than Neptune when all is said and done.
International Flavors & Fragrances isn't alone when it comes to being an unexpected CBD entrant. A number of retailers, including footwear and accessories retailer Designer Brands, teen retailers Abercrombie & Fitch and American Eagle Outfitters, upscale retailer Neiman Marcus, and numerous grocers, such as Kroger, have all stepped into the CBD arena to some extent.
While it's important for investors to recognize that there are still kinks to work out in the CBD space, such as with additives to food and beverages, this is nonetheless a high-growth opportunity that non-traditional cannabis players would be wise to take advantage of.
