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Inside the Market Tuesday’s TSX breakouts: This cannabis stock is up 50% in 2019 and six out of six analysts call it a buy

On today’s TSX Breakouts report, there are 66 stocks on the positive breakouts list (stocks with positive price momentum), and 11 stocks are on the negative breakouts list (stocks with negative price momentum).

The security highlighted today is a newly listed growth stock that appears on the positive breakouts list. Year-to-date, the share price is up 50 per cent and as a result, the share price may need to digest these gains before climbing higher. There are six analysts that cover this company and all six analysts have ‘buy’ calls. In January, former Coca-Cola executive joined the firm to help spearhead the company’s growth strategy.

Discussed below is Charlotte’s Web Holdings Inc. (CWEB-X). The share price can be extremely volatile and should be considered by investors with a high risk tolerance.

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A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Charlotte’s Web produces, manufactures and markets hemp-based CBD (cannabidiol) products including CBD liquid products, capsules, topicals and products for pets. Hemp extracts have less than 0.3 per cent THC and consequently have no psychoactive effects. The company does not produce marijuana.

In 2017, 64 per cent of the company’s revenue was booked from online sales and 36 per cent was from retail locations. However, management is targeting expansion of its distribution network, helped by the recent passage the Farm Bill. The company’s products are currently located in over 3,600 retail stores, including grocery store operator Safeway.

The company has been strengthening its leadership.

On Jan. 15, former Coca-Cola senior management executive Eugenio Mendez joined the company as the chief growth officer. Mr. Mendez was the former vice-president of global marketing of water, enhanced water and sports drinks at Coca-Cola. In a press release, chairman Joel Stanley noted, “We enthusiastically welcome Eugenio to the executive suite. He is a natural fit for Charlotte’s Web as we continue to evolve and plan for global expansion. As the industry’s leading brand, we will benefit greatly from his marketing experience and leadership.” Another seasoned management executive is the company’s chief operating officer Stephen Lermer who formerly worked at companies such as DuPont and Johnson and Johnson.

A game changer for the company occurred late last year with the passing of the 2018 Farm Bill, in which hemp was removed from the Controlled Substances Act and is now considered an agricultural product.

Chief executive officer Hess Moallem remarked in a press release, “The Farm Bill provides the added legal clarity necessary to expand our distribution reach. Hemp’s removal from the CSA has been a core legal requirement for many national retailers wanting to carry wholeplant hemp extracts. Removing the social stigma linked with being a “controlled substance” and having the ability to attain organic certification under the USDA will help to grow consumer acceptance. Further, Charlotte’s Web can now pursue relationships with federally regulated institutions such as banks, credit card companies, e-commerce marketplaces and advertising platforms in ways not previously accessible.”

On Nov. 27, the company reported solid third-quarter financial results. Revenue was US$17.7-million, up 57 per cent year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was US$5.4-million, up 23 per cent year-over-year. EBITDA margins were 30.5 per cent. Earnings per share came in at 2 US cents per share. As at Sept.. 30, the company had US$79.4-million on its balance sheet (funds raised from the recent initial public offering).

This newly listed Canadian company has its head office in Boulder, Col.. The stock began trading on the Canadian Securities Exchange on Aug. 30, 2018. The initial public offering price was $7 per share.

Dividend policy

Management is committed to growing the business and as a result currently does not pay its shareholders a dividend.

Financial forecasts

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Strong growth is anticipated for this company. The revenue estimates are US$72.6-million for 2018, US$160-million for 2019, US$299-million for 2020 and US$585-million for 2021. The EBITDA forecasts are US$23.8-million for 2018, US$55.7-million for 2019, US$107-million for 2020 and US$207-million for 2021. Earnings per share forecasts are 15 US cents in 2018, 35 US cents in 2019, 62 US cents in 2020 and US$1.13 in 2021.

Analysts’ recommendations

Analyst coverage continues to ramp up. Since the beginning of February,, three analysts initiated coverage on the company. This stock with a market capitalization of over $2-billion is now covered by six analysts, and all six analysts have "buy’ recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: Canaccord Genuity, Cormark Securities, Eight Capital, M Partners, PI Financial and Roth Capital Partners.

Revised recommendations

In Feb., Canaccord Genuity’s Derek Dley increased his target price to $26 from $21.

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Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 14.7 times the 2020 consensus estimate.

The consensus one-year target price is $25.75, suggesting the stock has 13 per cent upside potential over the next 12 months.

Individual target prices are as follows in numerical order: $25 (the low on the Street is from Jenny Wang, the analyst at Eight Capital), $25.50, two at $26, $26.50, and $29 (the high on the Street is from Damian Karp, the analyst at M Partners).

Insider transaction activity

Year-to-date, there has not been any trading activity reported by insiders.

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Chart watch

Technical analysis is limited given the stock’s brief trading history.

Since the initial public offering in August 2018, the share price is up a staggering 225 per cent. Year-to-date, the stock price has rallied 50 per cent.

The stock has reasonable liquidity. The stock’s three-month historical daily average trading volume is approximately 350,000.

Given the stellar short-term performance, the share price may need to digest these gains before climbing higher. On a pullback, there is strong technical support around $18. The next major ceiling of resistance is around $24.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

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If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive BreakoutsMarch 18 close
ABT-TAbsolute Software Corp $9.24
AP-UN-TAllied Properties REIT $48.57
ATA-TATS Automation Tooling Systems Inc $19.13
ACB-TAurora Cannabis Inc. $13.26
BAD-TBadger Daylighting Ltd $41.51
BMO-TBank of Montreal $104.11
BIR-TBirchcliff Energy Ltd $3.86
BDT-TBird Construction Inc $7.53
BLN-TBlackline Safety Corp. $5.70
BAM-A-TBrookfield Asset Management Inc $62.00
BRE-TBrookfield Real Estate Services Inc $17.00
BEP-UN-TBrookfield Renewable Energy Partners LP $41.92
BTB-UN-TBTB Real Estate Investment Trust $4.82
CAE-TCAE Inc $29.27
CFW-TCalfrac Well Services Ltd $3.58
CNR-TCanadian National Railway Co $118.40
TRST-TCannTrust Holdings Inc. $12.68
GIB-A-TCGI Group Inc $90.48
CWEB-TCharlotte's Web Holdings Inc. $22.72
CL-TCresco Labs Inc. $12.36
DIR-UN-TDream Industrial REIT $11.60
ECN-TECN Capital Corp. $4.34
EFN-TElement Fleet Management Corp. $8.43
EMH-TEmerald Health Therapeutics Inc. $4.14
ECA-TEncana Corp $10.03
ET-TEvertz Technologies Ltd $16.88
FN-TFirst National Financial Corp $30.60
GLXY-TGalaxy Digital Holdings Ltd. $2.40
GEI-TGibson Energy Inc $23.11
GIL-TGildan Activewear Inc $48.35
GWO-TGreat-West Lifeco Inc $32.20
HEXO-THEXO Corp. $8.91
IPL-TInter Pipeline Ltd $22.12
KNT-TK92 Mining Inc. $1.47
KEL-TKelt Exploration Ltd $5.48
MEQ-TMainstreet Equity Corp $49.30
MFC-TManulife Financial Corp $23.31
MRD-TMelcor Developments Ltd $13.53
MRC-TMorguard Corp. $193.93
NA-TNational Bank of Canada $62.65
NWH-UN-TNorthWest Healthcare Properties REIT $11.35
PONY-TPainted Pony Energy Ltd $1.94
PXT-TParex Resources Inc $21.60
PKI-TParkland Fuel Corp $40.14
PPL-TPembina Pipeline Corp $49.85
RY-TRoyal Bank of Canada $104.17
SJR-B-TShaw Communications Inc $27.91
SCL-TShawCor Ltd $22.07
SIA-TSienna Senior Living Inc $18.55
SRU-UN-TSmartCentres Real Estate Investment Trust $34.23
SLF-TSun Life Financial Inc $51.71
SU-TSuncor Energy Inc $45.66
T-TTELUS Corp $48.48
TVK-TTerraVest Capital Inc $13.25
TGOD-TThe Green Organic Dutchman Holdings Ltd. $5.10
TRI-TThomson Reuters Corp $75.27
TOU-TTourmaline Oil Corp $21.42
TA-TTransAlta Corp $8.86
TRP-TTransCanada Corp $61.11
TGL-TTransGlobe Energy Corp $2.90
TCN-TTricon Capital Group Inc $11.59
TC-TTucows Inc. $106.73
TWC-TTWC Enterprises Ltd. $13.95
VNR-TValener Inc $23.48
VFF-TVillage Farms International $21.76
WSP-TWSP Global Inc $71.64
Negative Breakouts
BDI-TBlack Diamond Group Ltd $1.82
DII-B-TDorel Industries Inc $12.44
ENGH-TEnghouse Systems Ltd $31.80
GSV-TGold Standard Ventures Corp. $1.39
MAXR-TMaxar Technologies Ltd. $6.05
MPVD-TMountain Province Diamonds Inc $1.25
NWC-TNorth West Co Inc $28.77
TEV-TTervita Corp. $5.95
TH-TTheratechnologies Inc $6.91
TCL-A-TTranscontinental Inc $17.07
WTE-TWestshore Terminals Investment Corp $18.63

Source: Bloomberg

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