The 3 Purest-Play CBD Stocks

There's arguably been no hotter industry over the past couple of years than legal marijuana. A number of the most popular pot stocks have seen their share prices rise by a triple-digit -- or maybe even quadruple-digit -- percentage on the heels of strong expected growth and ongoing legalizations in both the United States and throughout the world.

But the cannabis industry has numerous avenues that have generated their own hype. Right now virtually nothing is getting more attention than the rise of cannabidiol (CBD), the nonpsychoactive cannabinoid best known for its perceived medical benefits.

Explaining the buzz (and lack thereof) surrounding CBD

Cannabidiol can be extracted and processed from either the cannabis plant or hemp plant. Since hemp plants are generally easier to grow from a climate perspective than cannabis, and hemp plants are usually rich in CBD but contain very little or trace amounts of tetrahydrocannabinol (THC), the psychoactive cannabinoid that gets users high, hemp tends to be the preferred source of CBD production. Just understand that while hemp plants are a common source of CBD production, they're not the only source, with companies like CannTrust Holdings angling to grow up to 200,000 kilos of marijuana outdoors that will mostly be used for extraction purposes.

The allure of CBD is its perceived ability to provide medical benefits without the buzz associated with THC. This makes CBD a logical way to reel in new customers who might otherwise not be interested in traditional cannabis products. Since CBD extracts can be used in a host of derivative products, including edibles, infused beverages, capsules, oils, and topicals, it's an excellent target for cannabis companies looking to boost their margins.

Just how big could the CBD market be? According to the Brightfield Group, the U.S. hemp-derived CBD industry could grow from a mere $591 million in 2018 to $22 billion by 2022. That's a compound annual growth rate of 147%, which, if accurate, would run circles around the general growth rate tied to the global cannabis industry. This is why CBD is such a hot-button topic among investors at the moment.

Although there are numerous ways investors can gain exposure to CBD, since pretty much every marijuana grower will be producing CBD-containing derivatives as part of their product line, there are only three companies that are what I'd consider the purest-play CBD stocks.

Charlotte's Web Holdings

The most well-known pure-play CBD stock is hemp-oil and hemp-derived products producer Charlotte's Web Holdings (NASDAQOTH: CWBHF).

As of the end of last year, Charlotte's Web had its oils, topicals, and capsules in 3,680 retail doors throughout much of the United States, and was selling to consumers directly through its website. However, the passage of the 2018 Farm Bill legalized industrial hemp production and hemp-derived products, including CBD. It was signed into law by President Trump in late December, and the sudden proliferation and acceptance of CBD in the U.S. has pushed its retail store count to north of 6,000 as of March 31, 2019, giving it the largest share of the hemp-derived CBD market in the country.

The overwhelming success of its hemp-oil and CBD products has Charlotte's Web's management stomping the gas pedal. After planting and processing 300 acres of hemp in 2018, the company plans to more than double its harvest to 700 acres in 2019 (and beyond) to meet growing demand. This is a big reason behind Wall Street's expectation for 111% sales growth in 2019, and another 120% revenue surge in 2020.

But the best part about Charlotte's Web is that it's one of the most profitable marijuana stocks. Whereas most cannabis stocks are losing money hand over fist, Charlotte's Web is expected to deliver in the neighborhood of $0.75 per share in earnings in 2020. You can count on one hand how many pot stocks have a lower forward price-to-earnings ratio than Charlotte's Web.

CV Sciences

Next up among pure-play CBD stocks is Charlotte's Web's greatest competitor: CV Sciences (NASDAQOTH: CVSI).

Like its peer, CV Sciences is angling to place its PlusCBD Oil brand in as many retail doors as possible. At the end of March, the company had pushed its retail presence to 3,308 retail stores, up 48% from the sequential quarter ended December 31, 2018. Similar to Charlotte's Web, the passage of the farm bill has legalized and normalized hemp-derived CBD, which in turn has given CV Sciences a clear path to aggressively push its products into new retail stores and channels.

Pushing into new doors has certainly been a boon to the company's top-line results. Sales grew 85% year over year in the first quarter to $14.9 million, with 190 basis points of gross margin expansion to 70.8%. However, it should be noted that CV Sciences lost $9.4 million in the first-quarter after numerous consecutive quarters of modest GAAP profitability. Then again, this loss was the result of stock-based compensation, rather than recurring operating expenses driving the company into the red. It actually netted a small profit on an adjusted basis.

Maybe the biggest question mark surrounding CV Sciences is the company's expected filing of an investigational new drug application for a CBD-nicotine combo drug that it's been developing as a smokeless-cessation solution. While the idea is novel, it's also drawn harsh criticism. As things stand now, CV Sciences should be fine with just its CBD oil products line, even if its combo drug fails to impress.

Elixinol Global

A final pure-play CBD stock that investors can keep on their radars is Australian-based Elixinol Global (NASDAQOTH: ELLXF).

Elixinol is something of a "best of both worlds" CBD play. The company's Colorado operations handle the distribution of CBD-based products throughout North America, Europe, and even the Asia Pacific region. Meanwhile, its hemp food business in Australia, which was founded two decades ago, is a hemp food retailer, wholesaler, and exporter of raw materials and finished products. You could rightly say that, for the time being, Elixinol is the only truly global pure-play CBD stock.

Like its peers, Elixinol is willing to spend to bear the fruits of its expansion. In Colorado, the company is expanding an existing production facility to approximately 20,700 square feet, which should help boost its CBD-based product output to about 24,000 bottles per day. The company also acquired approximately 23,000 square feet of land adjacent to this expansion should it desire even more production in the future.

And, to sort of continue the theme, Elixinol Global was also ever-so-slightly profitable in 2018. The company reported 121% sales growth to 37.1 million Australian dollars (US$25.9 million), as well as AU$0.7 million in underlying EBITDA and net profit after taxes (about US$0.5 million).

As one of the top global brand-name companies in the CBD market, Elixinol is a name to remember.

10 stocks we like better than Charlotte's WebWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Charlotte's Web wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Sean Williams owns shares of CannTrust Holdings Inc. The Motley Fool recommends CannTrust Holdings Inc. The Motley Fool has a disclosure policy.