To say that the marijuana industry had a bad 2019 wouldn't do justice to just how awful things were. Despite seeming to be on the cusp of profitability, cannabis stocks throughout North America wound up being clobbered by a variety of issues, with a number of the most popular marijuana stocks losing well over half their value since the end of March.

In Canada, persistent supply problems have mostly been to blame. These supply bottlenecks and shortages are due to Health Canada's delay of the launch of derivatives until mid-December 2019 (derivatives generate much juicier margins for pot stocks than dried flower), and Ontario's failure to open an adequate number of dispensaries.

Meanwhile, high tax rates have proved a burden in a number of legalized U.S. states. California, as a perfect example, has been taxing the daylights out of its consumers, thereby allowing the black market to continue to significantly undercut legal channels on price.

A gloved individual holding a full vial and dropper of cannabidiol oil in front of a hemp plant.

Image source: Getty Images.

CBD was supposed to be the greatest thing since sliced bread...

Perhaps the one solace had been that the cannabidiol (CBD) market in the U.S. would thrive -- CBD being the nonpsychoactive cannabinoid best known for its perceived medical benefits.

In December 2018, President Trump signed the farm bill into law, thereby legalizing the industrial production of hemp and hemp-derived CBD. Since hemp is often rich in CBD and low in tetrahydrocannabinol (THC), the cannabinoid that gets users high, it's the perfect crop for CBD extraction, which will eventually be used to produce high-margin derivatives, such as edibles, infused beverages, topicals, and oils.

According to an estimate from the Brightfield Group in 2019, CBD should be among the fastest-growing trends in the U.S. for the foreseeable future. Brightfield's aggressive projection suggested that CBD sales will increase from a little north of $600 million in 2018 to $23.7 billion in the U.S. by 2023. For those of you keeping score at home, this represents a compound annual growth rate of more than 100% over a five-year span.

What's more, since CBD doesn't get users high, the potential consumer pool for products is substantially larger than with THC-containing products. Not to mention that with general stores and pharmacies able to sell CBD products, they're more widely available to consumers than THC-focused products, which can be purchased only from a dispensary.

A researcher in a white lab coat making notes on a clipboard in the middle of an outdoor hemp grow farm.

Image source: Getty Images.

...then the FDA weighed in

Everything looked perfect for CBD-focused companies... until the U.S. Food and Drug Administration (FDA) weighed in.

You see, in addition to regulating pharmaceuticals, the FDA is responsible for controlling additives to food, beverages, and dietary supplements. The excitement surrounding CBD has always been the idea of incorporating the substance into a variety of foods and beverages. In fact, a handful of brand-name companies, including Mondelez International, had tinkered with the idea of creating CBD-infused foods or beverages.

However, the FDA has poured cold water on what's been a red-hot industry. After months of review, the FDA laid down the hammer on CBD enthusiasts in a Nov. 25 consumer update. Without providing any concrete guidance, the FDA stated the following:

  • CBD has the potential to harm you.
  • CBD can cause side effects that you might not notice.
  • There are many important aspects of CBD that we just don't know.

In effect, the FDA doesn't view CBD as a safe substance, at least not at this time.

Of course, if you've been following the FDA's research for some time, this consumer update was wholly expected. Former FDA Commissioner Scott Gottlieb, who stepped down in spring 2019, somewhat recently tweeted out that CBD isn't safe. Gottlieb also suggested in his tweets that, while the average compound takes two or three years of review before getting the go-ahead to be added to the food and beverage supply, it could take perhaps five years to develop guidelines for CBD since it's a more complex substance. This move by the FDA has been telegraphed for some time, but it nonetheless put a serious damper on high-flying CBD players, including Charlotte's Web (OTC: CWBH.F), the CBD market share leader of a very diverse industry.

The facade of the Capitol building in Washington, D.C.

Image source: Getty Images.

A battle may be brewing between lawmakers and the FDA over CBD

However, the FDA's decision to keep CBD out of food, beverages, and dietary supplements for the time being may not be an end-all for the industry.

This past week, on Jan. 15, a bipartisan group of lawmakers in the House of Representatives introduced H.R. 5587, a bill that would amend the federal Food, Drug, and Cosmetic Act to classify hemp-derived CBD as a dietary supplement. With CBD products being lumped into the same category as vitamins, the FDA would be required to allow them onto store shelves without the testing that's required of pharmaceutical products, if the bill becomes law. 

How likely is this bill to become law? While the typical answer for anything involving cannabis or cannabinoids is typically poor, considering that Senate Majority Leader Mitch McConnell (R-Ky.) has blocked cannabis reform legislation from reaching the Senate floor for vote, this case might be different. With hemp farming a lucrative industry in Kentucky, McConnell's home state, he was a major proponent of the farm bill. Anything that would open the door to higher industrial hemp production and processing has a real shot at making it to the Senate floor.

Further fueling momentum is that the FDA approved CBD-based oral medicine Epidiolex from GW Pharmaceuticals (NASDAQ:GWPH) in June 2018. GW Pharmaceuticals' lead drug is the first cannabis-derived medicine to be given the green light by the FDA after it lead to reductions of between 30% and 40% in seizure frequency from baseline in clinical studies of patients with two rare types of childhood-onset epilepsy. The thinking here being that if CBD has already shown to be medicine, perhaps it deserves to be classified as a dietary supplement.

Four vials of cannabidiol-rich liquid lined up on a counter.

Image source: Getty Images.

Yes, you can still make money by investing in the CBD craze

No matter what winds up happening with CBD, there are still ways that investors can make money.

As noted, Charlotte's Web is the market share leader among CBD products. While the FDA's consumer update is not what most consumers wanted to hear, it shouldn't be that big of a problem for Charlotte's Web. That's because the company has primarily focused on building up its brand with topicals and oils, neither of which has drawn the ire of the FDA. As long as Charlotte's Web avoids making unsubstantiated medical claims on its labeling or through its marketing, I don't see it being adversely impacted for long by the recent FDA decision.

The other consideration here should be extraction-service providers. Neptune Wellness Solutions (NASDAQ:NEPT), for instance, takes cannabis and hemp biomass and processes it to yield the resins, distillates, concentrates, and targeted cannabinoids that go into making high-margin derivatives. Neptune has around 200,000 kilos of annual processing capacity in Canada, but its purchase of SugarLeaf last year moved it into the U.S. in a big way. On a run-rate basis, Neptune Wellness should be capable of 1.5 million kilos of annual processing capacity in the U.S., which for oils, topicals, and other derivatives won't slow down, no matter what stance the FDA takes.

CBD can still be a mammoth industry in the U.S. and throughout North America, so make sure it -- and H.R. 5587 -- stays on your radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.