Investors Should Be Cautious as CBD Products Go Mainstream

The passage of the 2018 Farm Bill has ushered in an explosion of hemp-based cannabidiol (CBD) products now that hemp has been legalized. It seems everyone and their brother is making a product with CBD. As evidence of how quickly CBD has gone mainstream, you’ll soon see CBD stores at the mall.

Brightfield Group noted that the category has grown by more than 80% already and has already become a $590 million market.  A couple of weeks ago, investment firm LB Equity announced that it has raised $50 million for it LB Equity Emerging Growth Fund which will focus on CBD beauty and wellness products. “LBE is targeting the massive opportunity available at the intersection of the rapidly growing cannabis industry and the many emerging brands within the skincare, beauty and related personal care sector,” said Jay Lucas, Managing Partner of LB Equity. 

Cowen & Co.’s senior analyst Vivien Azer wrote, “Our $1.6 billion estimate for the CBD market would imply a 20% share of this market. The importance of retail adoption is reflected in the category makeup of the herbal supplement market, where we can see that over 17% of sales come from mass market retailers.”

With all this excitement, many have lost sight of the response by the Food & Drug Administration’s (FDA). “We treat products containing cannabis or cannabis-derived compounds as we do any other FDA-regulated products – meaning they’re subject to the same authorities and requirements as FDA-regulated products containing any other substance.”

No CBD product can make any kind of health claim without being approved first by the FDA. In 2017, the FDA sent out warning letters to companies that claimed their CBD products could alleviate various medical conditions. Included on the list was Charlotte’s Web Inc. (CWBHF) , which was known as Stanley Brothers at the time. The company addressed the issue and no longer makes those claims.

In addition to that, it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. That means any edibles with CBD in it are illegal unless it has FDA approval. 

Health departments in New York City began shutting down businesses that were adding CBD to menu items. Foods and drinks that makers just added CBD to were told to stop. The NYC Health Department said it would begin issuing fines in July. 

The state of Ohio also began a crackdown and raided many stores carrying CBD products. The state believes CBD falls under the realm of medical marijuana whether it is derived from hemp or not. Many companies have had to remove products from the shelves and producers that had been selling CBD infused products are finding it harder to operate.

Investors will need to be cautious when choosing how to capitalize on CBD products.  Charlotte’s Web and CV Sciences (CVSI) have already shown themselves to be market leaders in hemp-derived CBD.  According to the 2017 Brightfield survey, 6.3% preferred Charlotte’s Web, with 3.6% preferring CV Sciences. These names are typically mentioned when discussing CBD companies, but investors may also want to look at emerging brands like Elixinol Global Limited (ELLXF) or play this trend by looking at the retailer Green Growth Brands Inc. (GGBXF) versus looking at the producers. 

Green Growth Brands

Green Growth Brands announced this week that it was signing a deal with Simon Property Group Inc. (SPG) to open a chain of CBD stores. As many as 108 CBD stores could be opened with the first one  opening in Kentucky. GGB will expand its chain of CBD-infused personal care product shops under the Seventh Sense Botanical Therapy brand.

Simon is the biggest mall operator in the country with high-profile properties including Roosevelt Field in metro New York; The Galleria in Houston, Texas; and Woodbury Common Premium Outlets in Central Valley, NY. 

“Our partnership with Simon allows GGB to launch our brands and CBD products in premier shopping destinations across the U.S.,” said Peter Horvath, CEO of GGB. “Our management team has had decades of experience working closely with developers and operating premium retail stores in their properties.

Green Growth is a fairly young public company and only recently began trading. Its 52-week low is $2.27 and its year high was $5.20. The stock was lately trading at $4.46.

Elixinol Global Limited

Elixinol is an Australian based company headed by Paul Benhaim, founder of Hemp Foods Australia. The company sells tinctures, organic hemp skincare under the name Sativa and water soluble CBD oil liposomes. Elixinol also sells a vape pen that dispenses CBD hemp extracts in precise serving sizes. Elixinol is known for its third-party lab testing and stringent quality controls. The company’s products are often highly reviewed and rated.

The company just expanded its EU operations and is now available in 41 countries. Last month it launched its entry into the New Zealand marketplace. Benhaim is such a huge believer in hemp that he has begun backing a hemp plastics venture. Many industry watchers believe that industrial hemp will be a bigger part of the market over consumer hemp, but those days are further away than the current consumer demand. 

Elixinol stock was lately trading at $2.18, which is above its year’s low of 95 cents, but below its 52-week high of $2.60. It’s a relatively small company and has flown under the radar since it is Australian, but it’s a nice change of pace from the typical hemp company picks.

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