For years, marijuana stocks could do no wrong. All cannabis companies simply had to do was promise investors pie-in-the-sky growth over the long run, and their share prices shot into the heavens.

But following the legalization of recreational marijuana in Canada, this parade of promises is no longer sufficient to satiate investors. Nowadays, operating results actually matter, and most pot stocks have failed to generate sales growth and/or bottom-line improvements that validate their lofty valuations.

And it's not just Canada where these operating results matter. Marijuana stocks in the U.S. have been hit just the same if they've struggled to deliver on sales and profitability expectations. What's more, since the U.S. federal government has maintained a Schedule I classification on cannabis, pot stocks are forced to deal with the ramifications of operating in a federally illegal environment.

Four vials of cannabidiol oil lined up on a counter.

Image source: Getty Images.

This push-pull between near-term growth concerns and long-term promise has investors hedging their bets on a high-margin niche play in the United States: cannabidiol (CBD).

CBD remains all the rage in the United States

Cannabidiol is the nonpsychoactive cannabinoid that's best known for its perceived medical benefits. In essence, it won't get users high, which makes it a cannabinoid that more consumers might be willing to try. Most notably, CBD can be found in the cannabis or hemp plant. Since hemp is a much easier and cheaper plant to grow than cannabis, it makes for the perfect crop to yield CBD.

Just how big could the CBD market be in the United States? Following the passage of the Farm Bill by the U.S. federal government in December, which gave the green light to industrial hemp production and hemp-derived CBD not containing tetrahydrocannabinol (THC), the cannabinoid that gets users high, the Brightfield Group estimates $23.7 billion in sales by 2023. If this aggressive estimate proves accurate, we'd be looking at a compound annual growth rate in CBD sales of more than 100% over a five-year period, beginning in 2019.

And the thing to remember about CBD sales is that they're becoming more mainstream by the day. Whereas consumers are probably used to the idea of purchasing cannabinoid-based products from a licensed dispensary, the Farm Bill gives general retailers the right to carry non-THC-containing CBD products.

Hemp plants in an outdoor farm growing at sunrise.

Image source: Getty Images.

Slowly but surely, CV Sciences is thriving

As you might imagine, the signing of the Farm Bill has taken what had been a product only a select few retailers would carry and made it mainstream. That's opened up the hemp and hemp-based CBD product space to a host of new competition. But as this new competition has surfaced, one CBD stock has done far better than Yours Truly would have imagined: CV Sciences (CVSI -4.07%).

Back in early August, I suggested that CV Sciences was a company to avoid, albeit my timeframe for that prediction was the month of August. My primary beef with CV Sciences at the time was that it was being forced to go toe-to-toe with market share leader Charlotte's Web (CWBHF -1.90%) in a number of Kroger (KR 0.76%)-owned stores.

You see, CV Sciences had announced a deal on June 12 to carry its flagship PlusCBD Oil brand in 945 Kroger-family locations in 17 states.  But just over a month later, Charlotte's Web announced a deal with Kroger to have its topical CBD products carried in 1,350 Kroger family stores across 22 states. Even though CV Sciences had its initial distribution agreement expanded to match Charlotte's Web, I wasn't a big fan of the idea that industry leader Charlotte's Web would now be sharing shelf space with CV Sciences.

However, this increased competition doesn't seem to be having much of an adverse impact on CV Sciences. Just as Charlotte's Web recently nabbed a more than 700-store deal with Vitamin Shoppe, CV Sciences announced a 515-store deal with Vitamin Shoppe a week ago. In total, CV Sciences has seen its retail door count more than double this year to over 5,500 locations, which still trails, but is within striking distance, of Charlotte Web's roughly 8,000 locations. CV Sciences has also committed to more than 500 acres of hemp planting in 2019, which compares to 862 acres for Charlotte's Web.

A vial of cannabidiol-rich liquid lying atop cannabis flowers.

Image source: Getty Images.

In addition, CV Sciences has been generating operating profits like its primary rival. Charlotte's Web and CV Sciences reported respective net income of $2.2 million and $1.2 million in the second quarter. However, CV Sciences' $3.6 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) looks to be far more impressive than Charlotte's Web's $3.9 million in adjusted EBITDA considering that Charlotte's Web produced more in Q2 sales ($25 million versus $16.9 million). 

So far, CV Sciences has been able to go toe-to-toe with Charlotte's Web and is thriving.

Why is CV Sciences so "cheap"?

If the CBD market is such an attractive investment opportunity, and CV Sciences is expanding its retail doors and is already profitable, you might be wondering why its valuation trails Charlotte's Web so significantly. My suspicion is that it has everything to do with the company's checkered past.

Back in June 2017, the Securities and Exchange Commission filed an enforcement action against the company and then-CEO Michael Mona. This action concerned financial reporting irregularities related to an acquisition back in 2013. A year later, CV Sciences announced that there had been a settlement in the action. Without admitting wrongdoing, the company paid $150,000, and Mr. Mona agreed to an order that prohibits him from serving as an officer or director of a public company for five years. Mr. Mona also paid a $50,000 penalty. Essentially, this meant Mona would be out as CEO, and it failed to calm skittish investors. 

A man in a suit holding a neat stack of cash behind his back with his fingers crossed.

Image source: Getty Images.

More recently, CV Sciences has been contending with lawsuits and short-seller reports. In August 2018, noted short seller Citron Research published a report claiming that a patent application for the company's CBD-nicotine combo drug – CV Sciences has a pharmaceutical research arm as well – had been rejected by the U.S. Patent and Trademark Office. According to Citron, this rejection was never disclosed to shareholders.

In other words, the issue with CV Sciences comes down to trust. If the company's new management team can rebuild trust with Wall Street and investors, all while continuing to deliver adjusted profits from its CBD products, then it's possible that its valuation could soar. Unfortunately, there's no concrete guide on how to rebuild investor trust once it's been lost, which is why there's such a noticeable valuation difference between CV Sciences and Charlotte's Web.

I, for one, believe that gap can be closed over time, but it's important to realize that trust isn't earned or given overnight.