It wasn't all that long ago that cannabidiol (CBD) pioneer Charlotte's Web Holdings (OTC:CWBHF) was red-hot. The stock had more than doubled year to date in early August. The company was rapidly adding new retail locations to its distribution network.

But Charlotte's Web quickly went from hot to not. Shares are more than 60% below their highs from just a few months ago and are down close to 20% year to date. Two recent developments have made the situation worse: a warning from the U.S. Food and Drug Administration (FDA) about CBD and an impending class action lawsuit against the company. Is it time to worry about Charlotte's Web?

Man with hand on his face looking at a touchscreen tablet showing a declining stock chart.

Image source: Getty Images.

The bigger concern

On Nov. 25, the FDA released a consumer update warning about the potential risks of CBD. The agency made three main points:

  1. CBD could potentially cause harm to consumers, including causing liver injury and affecting metabolism.
  2. CBD can cause side effects such as drowsiness, gastrointestinal problems, and moodiness.
  3. There's a lot that remains unknown about CBD, including the effects on children, long-term effects on adults, and the potential for causing male reproductive problems.

None of this was new information. However, the FDA's consumer update was the strongest statement yet from the agency about the risks of using CBD. It reflected just how uneasy the FDA is with approving CBD products without significant additional research into the potential effects of the cannabis-based chemical.

Charlotte's Web had hoped that the FDA might show some signs of increased tolerance of CBD products. CEO Deanie Elsner said in the company's third-quarter earnings conference call that she was "optimistic" that the agency was "committed to finding a positive path forward for the [CBD] industry."

The lack of FDA regulations allowing ingestible CBD products presents a major obstacle for Charlotte's Web. Elsner has noted in the past that ingestible CBD products sell at much higher volumes than topical CBD products in stores that carry both product lines. The company's growth prospects will be constrained until the FDA provides positive news -- and it's clear that isn't going to happen anytime soon.

An added headache

Charlotte's Web released a public statement on Monday that it was aware of a class action suit filed in the Northern District of California alleging that the company mislabeled its CBD products as dietary supplements. The company stated that it "believes that its products are accurately labeled and that the claims are without merit." Charlotte's Web added that it "intends to vigorously defend itself against any such suits."

This class action suit, which as of earlier this week had not yet been served, is an added headache for Charlotte's Web. At this point, though, it doesn't appear to be as big of a concern as the FDA's stance on CBD products.

The FDA has issued warning letters to quite a few companies about marketing CBD products illegally, including labeling the products as dietary supplements. The agency singled out 15 companies for these practices in late November.

However, it should be noted that Charlotte's Web has not received an FDA warning. Elsner stated in the company's Q3 conference call that Charlotte's Web "fully support[s] the FDA's position on unsubstantiated claims."

Time to worry?

Worry might be too strong of a word to use with respect to Charlotte's Web's situation -- at least for now. The company should be able to continue delivering solid sales growth. Charlotte's Web projects year-over-year revenue growth between 40% and 50% until the FDA clarifies CBD regulations.

I've been a fan of Charlotte's Web stock for a while and have considered it to be one of the most attractive cannabis stocks. My view, now, though, is that it's best for investors to tread carefully with the stock.

In Charlotte's Web's Q3 conference call, Elsner described a worst-case scenario where the FDA says that CBD dietary supplements are illegal and enforces its decision. The agency's recent consumer update about CBD doesn't provide a warm-and-fuzzy feeling that this worst-case scenario won't become a reality.