Although marijuana stocks have been a hot investing trend for years, perhaps nothing eclipses the excitement that's surrounded cannabidiol (CBD), the nonpsychoactive cannabinoid found in cannabis and hemp that's best known for its perceived medical benefits.
According to estimates released earlier this year by the Brightfield Group, U.S. CBD sales are expected to skyrocket from around $600 million in 2018 to $23.7 billion by 2023. For those of you keeping score at home, this is, indeed, a greater-than-100% compound annual growth rate over the next five years.
Making matters more exciting, President Trump signed the farm bill into law last December, making it legal to grow industrial hemp and derive CBD from hemp. Within the U.S., cannabis is still illegal at the federal level, but since hemp is abundant in CBD, it's the perfect low-cost solution for CBD extraction. And given that CBD can be infused with so many different products, it only seemed logical for cannabidiol to become the next big thing in the investing world.
The FDA rains on CBD's parade
Unfortunately, next-big-thing investment bubbles always seem to pop. The only thing investors never know is when it'll happen or what will cause it. In the case of CBD, the culprit appears to be the U.S. Food and Drug Administration (FDA).
For months, the FDA has been reviewing CBD as a potential additive to food, beverages, and dietary supplements in an effort to determine whether or not it's safe. This determination was ultimately expected to result in guidelines for CBD as an additive. However, on Nov. 25, the FDA disappointed most investors, along with CBD product manufacturers, when it unveiled a consumer update. There were three primary points of the FDA's consumer update on CBD that everyone should know. According to the FDA:
- CBD has the potential to harm you.
- CBD can cause side effects that you might not notice.
- There are a number of important aspects about CBD that the FDA doesn't know.
In other words, the FDA provided an update to its thinking, as promised months prior by Chief Information Officer Dr. Amy Abernethy, but isn't inclined to give CBD a clean bill of health. In fact, this latest update suggests there are unequivocal dangers in consuming CBD, and that it could be some time before the regulatory agency has conducted enough testing to make a determination on the compound as an additive. This latter point was confirmed by now-former FDA Commissioner Scott Gottlieb, who believes it could be years before a proper safety profile is available for CBD.
Yes, you can still make money on CBD
Obviously, this news was a real buzzkill for CBD investors, and it has some on Wall Street questioning whether CBD should be avoided altogether as an investment. While I do believe that tempered expectations are warranted, I also feel that there's still plenty of opportunity for investors to make money in this space. And the easiest way to do that is by focusing on two areas.
1. Extraction-service providers are a relatively safe consideration
First, consider putting your money to work in extraction-service providers, which are the essential middlemen of the CBD product manufacturing process. Names to pore over here include Neptune Wellness Solutions (NASDAQ:NEPT), Valens GroWorks (OTC:VLNCF), and MediPharm Labs (OTC:MEDIF).
Generally speaking, the beauty of the extraction-service model is that these three companies are able to lock in volume and fee-based price commitments for a relatively long amount of time (18 to 36 months). This creates a fairly steady and predictable stream of revenue and cash flow for Neptune, Valens, and MediPharm. It's worth noting that Valens GroWorks and MediPharm Labs are already profitable, despite ramping up their cannabis and hemp extraction efforts just one year ago.
But understand that Valens and MediPharm have processing facilities in Canada and are, therefore, primarily focused on the Canadian market. Neptune Wellness, which acquired SugarLeaf earlier this year, will be developing a 24,000-square-foot hemp-processing facility that'll be capable of 1.5 million kilos of annual run-rate extraction capacity. Neptune is the most direct CBD play among extraction-service providers.
2. Stick with the market share leader
Despite the U.S. CBD industry being highly diverse, Charlotte's Web is the clear market share leader. Since the year began, the company has more than doubled its retail distribution from 3,680 doors to more than 9,000 in the United States. But more importantly, even though CBD is unlikely to be approved as a food, beverage, or dietary supplement additive anytime soon, Charlotte's Web has focused most of its attention on oils and topicals. Thus, this may slow the company' growth trajectory a bit, but it doesn't disrupt the distribution Charlotte's Web has already built.
Charlotte's Web has also demonstrated its ability to generate an operating profit without the aid of one-time benefits. Although expenses are rising a bit as the company looks to innovate and expand its U.S. footprint, it's clearly shown that selling CBD products can be profitable.
Temper your near-term expectations with Charlotte's Web and CBD a bit and you should do just fine.