As we near the finish line for 2018, one thing is for certain: It's been a game-changing year for the cannabis industry.
In October, following nine decades of prohibition, Canada officially legalized recreational marijuana for adults. Although it's going to take a few years for Canadian growers to get fully up to speed, as well as allow Health Canada time to approve new cultivation licenses and sales permits, this is an industry that could generate in the neighborhood of $5 billion in annual sales by the early part of the next decade.
This was also a year that saw continued expansion in the United States, where marijuana is still a Schedule I drug -- i.e., wholly illegal, prone to abuse, and not recognized as having any medical benefits -- at the federal level. During midterm elections, residents in Utah and Missouri voted in favor of statewide medical cannabis initiatives, bringing the total number of states to have legalized in some capacity to 32. Meanwhile, Vermont and Michigan became the respective 9th and 10th states during the year to OK adult-use weed.
And the breakthroughs just keep on coming.
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The Farm Bill is a signature away from becoming law
On Tuesday, the Senate voted overwhelmingly (87 to 13) to approve the $867 billion Farm Bill, followed by a landslide vote on Wednesday by the House (369 to 47). This is a bill designed to expand farm subsidies and provide permanent funding for farmers' markets and local food programs.
Perhaps more important to the investment community and the cannabis movement, it would also legalize products made from hemp and cannabidiol (CBD) from the hemp plant. Cannabidiol is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Unlike tetrahydrocannabinol (THC), it does not get the user high.
Hemp itself has many industrial uses. It can be refined and used in paper, clothing, plastics, paint, insulation, and even animal feed. It's also a plant that tends to be rich in CBD production with minimal THC content. This makes it a perfect alternative for CBD production as opposed to extracting CBD from the cannabis plant. According to an analysis from the Brightfield Group, the CBD market is expected to grow by 147% per annum, from $591 million in 2018 to an estimated $22 billion by 2022.
In addition to legalizing the production of hemp and easing access to CBD, it would also free up hemp-based business to more freely deal with banks. As a reminder, financial institutions have mostly kept their distance from any businesses involved with THC or CBD, since they're both tightly regulated by the federal government.
With the passage of the Farm Bill in both houses of Congress, it'll now make its way to President Trump's desk for his approval and signature. Trump has already expressed support for the bill, suggesting that passage of the Farm Bill is simply a formality at this point.
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These marijuana stocks could get a lift from the Farm Bill
So, what pot stocks would receive a boost from the passage of the Farm Bill?
To start with, how about Canada's largest marijuana stock by market cap, Canopy Growth (CGC -10.51%). Investors might overlook the fact that Canopy Growth is in the midst of a roughly 425 million-Canadian-dollar takeover of ebbu, a Colorado-based hemp research company. Ebbu's intellectual property (IP) is expected to help lower costs and improve yields and quality at Canopy's hemp-growing operations in Saskatchewan.
However, Canopy Growth also purchased Ebbu with the idea being that it could get its foot in the door in the United States, as well as set itself up for success should a broad-based hemp bill pass in Congress. With the Farm Bill looking very likely to be signed into law, Canopy Growth will hold key IP that could support a rapidly growing U.S.-based hemp industry.
Cannabinoid-based drugmakers could receive a lift, too. GW Pharmaceuticals (GWPH) became the first drugmaker to receive an approval from the U.S. Food and Drug Administration for a cannabis-derived therapy this June. GW Pharmaceuticals' lead drug Epidiolex ran circles around the placebo in multiple late-stage studies designed to reduce seizure frequency in patients with two rare types of childhood-onset epilepsy. Already bearing the least restrictive scheduling (Schedule V) possible, GW Pharmaceuticals' Epidiolex could be received well with the passage of the Farm Bill.
I'd also opine that an indirect boost might be felt by Charlotte's Web Holdings (CWBHF -0.14%), a provider of CBD-based products in more than 3,000 retailers across the country. Whereas GW Pharmaceuticals can claim a medical benefit for its products, Charlotte's Web cannot. Nevertheless, that hasn't stopped consumers from gobbling up CBD-based products in greater numbers, with Charlotte's Web recording $17.7 million in sales in its most recent quarter, as well as an operating profit of about $4 million, if one-time benefit and loss adjustments are excluded.
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This marijuana industry may not appreciate the Farm Bill as much
On the other hand, the Farm Bill may turn out to be partially unwelcome for cannabis dispensaries like MedMen Enterprises (MMNFF).
You see, dispensaries like MedMen have to go through a rigorous process to be licensed in the states they operate in. In return, MedMen and its dispensary peers gain the exclusivity of carrying and selling legalized cannabis products. If hemp-derived CBD is legalized, it would presumably open the door for a wide swath of retailers to carry hemp-based CBD products should they choose. These CBD products are high margin, and they're an excellent lure to bring in foot traffic and introduce new consumers to the world of legalized cannabis.
In other words, the Farm Bill may introduce MedMen and U.S.-based pot dispensaries to an unwelcome amount of competition that could slow both foot traffic and operating margins.
Now we simply watch and wait for President Trump's signature.
