As the S&P 500 miraculously continues to hit new all-time highs, the cannabis sector as a whole is faltering. Despite two monumental cannabis-related events late in 2018, the national legalization of cannabis in Canada and the passage of the Farm Bill in the United States, the early enthusiasm for cannabis stocks just didn’t last all that long. Canada was the first industrialized nation to legalize the adult-use of cannabis and its sale. The 2018 Farm Bill included provisions from the Hemp Farming Act ending nearly 80 years of prohibition on industrial hemp in the U.S. However, the age old trading expression of “buy the rumor, sell the fact,” couldn’t apply more.
It’s kind of crazy that even though the U.S. economy is booming (at least from an equity perspective), and despite projections that the U.S. could represent more than a third of the global hemp market according to New Frontier Data, and CBD products alone are projected to reach the $22 billion mark soon, all sorts of publicly traded cannabis companies are struggling. Canopy Growth Corporation (NYSE: CGC), the biggest cannabis company in the world, fired their leader and figurehead, Bruce Linton. Their share price is off more than 20% from their late 2018 all-time highs. Hemp derived CBD products are still illegal to sell as a supplement in the United States. While the major stock indices continue to surge up 20% plus, cannabis ETF’s like MJ, THCX and YOLO are breaking down 10 – 20% plus this year. If you are an investor that follows relatives strength indicators, that’s a pretty bad sign.
The popularity of CBD cannot be understated. As trending topics go, CBD has pushed blockchain off the hill. People are wild about the potential health benefits of CBD. An all-natural alternative to pain relief and anxiety seems to be something the public has a craving for. While more research is necessary, studies so far show that CBD could potentially be a very effective analgesic and anxiolytic. Unfortunately though for many CBD companies, it looks as though it will remain categorized as a drug by the FDA instead of a supplement. CBD for pain, stress and a number of other medical conditions may ultimately only be available as an over-the-counter drug.
Early in 2018, before the Farm Bill was signed into law legalizing all hemp with less than .3% THC content o n a dry-weight basis, the FDA elected to approve the GW Pharmaceuticals anticonvulsant drug Epidiolex. It’s the first cannabis derived drug to ever be approved by the FDA and its main constituent is CBD. At first, it felt like a tremendous victory for the cannabis industry as a potential sign of the advancement of cannabis law reform since a major federal regulatory body had finally made clear that cannabis has true medical value. However, by approving Epidiolex the FDA also designated CBD as a drug instead of a supplement.
Since CBD is now officially a drug, it cannot also be a supplement according to the Federal Food, Drug and Cosmetic Act (FD&C Act). If any of the CBD companies out there had been able to setup before the FDA approved Epidiolex, those companies would be able to work uninhibited instead of having the same banking,.merchant service and marketing problems of the marijuana industry. CBD companies still lose merchant service accounts and the FDA is sending out warning letters to many of the big CBD companies that are claiming CBD can help people with pain and anxiety. It is making growth very slow and scaring potential investors away. Having explained that, it is partially the CBD industry’s fault that growth is so slow too.
If you look around at CBD products, you will find a whole lot of plain hemp oils, CBD gummies and vapes. Any CBD baked goods you see are typically full of unhealthy ingredients like sugar and saturated fats. Same with CBD gummies. Here is the issue; if CBD is for a person’s health and wellness, then why put CBD in unhealthy products? It looks as though many CBD companies just took the recipes for psychoactive marijuana edibles and switched out THC for CBD. If you are unwell or focused on your physical fitness and the non-psychoactive effects of CBD appeal to you, then you will likely want your CBD solution to be healthy as well. It’s as if the CBD industry is marketing itself to the wrong demographic.
The demand for cannabis has already begun to plateau in Canada, and rescheduling cannabis in the United States is likely still years away. The Republican party fears that passage of any federal bill that had far reaching cannabis law reform built-in, such as granting banks the freedom to do business with cannabis companies, would trigger more state ballot initiatives to legalize marijuana. Since cannabis law reform seems to be more of a democrat issue, federal reform may draw more democrats to vote in the 2020 election than republicans. CVS and Walgreens may start to sell CBD products soon, but they will likely be as over-the-counter drugs rather than as supplements. Existing CBD companies would be doing themselves a favor by ensuring they have their products labeled correctly, refrain from making medical claims about the benefits of CBD without strong scientific evidence to back it up.
There are a myriad of issues facing the cannabis space. Even though hemp and CBD products are expected to be a bigger industry than the psychoactive marijuana market, every cannabis ETF out there is weighted towards marijuana focused companies rather than hemp companies. So far, the legalization of hemp has not been the blockbuster everyone may have been hoping for. In the meantime, if you are interested in high-quality CBD gummies and oils, make sure you look for a certificate of analysis verifying the CBD concentration and checkout the label for the ingredients. From an investment perspective though, while the rest of the economy looks in-line to continue its surge, the cannabis space remains in disarray.