For years, there wasn't a hotter investment opportunity on Wall Street than marijuana. With tens of billions of dollars in sales being conducted in the black market, it seemed only logical that North America's legal cannabis stocks would benefit after Canada became the first industrialized country in the modern era to legalize adult-use weed, and two-thirds of U.S. states OK'd marijuana use to some varied degree.

But marijuana, in a general sense, began taking a back seat in late 2018 and throughout much of 2019 to a more niche movement: cannabidiol (CBD).

A person holding a vial of cannabinoid-rich liquid in front of flowering cannabis plants.

Image source: Getty Images.

CBD was hailed as the greatest thing since sliced bread

As many of you are probably aware, CBD is the nonpsychoactive cannabinoid that doesn't get users high, but is perceived to have medical benefits. Since its users won't get buzzed, there was the belief that the market potential for cannabidiol would greatly exceed that of tetrahydrocannabinol (THC)-containing products -- THC being the psychoactive cannabinoid often associated with smoking or consuming marijuana.

Just how big? According to estimates from the Brightfield Group, CBD sales in the United States in 2018 were expected to come in slightly above $600 million. By 2023, these U.S. CBD sales were projected to total $23.7 billion. For those of you keeping score at home, that's a forecasted compound annual growth rate of more than 100%! That compares to annual growth estimates for cannabis that typically range from 20% to 30%.

Aside from being able to attract a broader swath of customers relative to cannabis, CBD was also expected to benefit from the signing of the Farm Bill by President Trump in December 2018. This bill allowed for the industrial production of hemp and hemp-derived CBD -- hemp is a low-cost crop that's low in THC and often rich in CBD, making it perfect for extraction purposes -- and gave general retailers like Kroger, CVS Health, and even your local gas station convenience store the ability to offer CBD-containing products.

It seemed like nothing could possibly go wrong for CBD in the United States. But it did.

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

Image source: Getty Images.

The CBD party has come to an abrupt halt

Today, the CBD hype train has most definitely derailed, and that can primarily be traced to three issues: The Food and Drug Administration (FDA), safety, and efficacy.

One of the biggest lures of the CBD industry was the expectation that it could be added to food and beverages. But this was a decision that was to be made by the FDA. Ultimately, the regulatory agency decided to take a cautious stance on CBD and chose not to green-light adding it to food, beverages, and dietary supplements.

To build on this point, former FDA Commissioner Scott Gottlieb has cautioned that establishing guidelines for a new compound as a food or beverage additive can typically take the agency two or three years. Since CBD is a more complex compound, it could take even longer for the FDA to come to a decision. As a result, CBD's ceiling has been drastically lowered, with topicals and oils remaining the primary source of CBD sales.

Secondly, there are clear safety concerns. In a Nov. 25 consumer update, the FDA provided new information on its research into CBD. Although there were numerous points made, the agency was straightforward in its views that CBD has the potential to harm users, that it could cause side effects that users may not notice, and that the long-term effects of using CBD aren't fully known yet.

And third, CBD's presumed medical benefits have been far from bulletproof in clinical trials. GW Pharmaceuticals' (NASDAQ:GWPH) Sativex, which is a THC- and CBD-containing oral therapy approved in more than a dozen countries outside the U.S., failed a cancer pain study in the U.S. in 2015.

If you want something more recent than GW Pharmaceuticals' 2015 flop with Sativex, look no further than Zynerba Pharmaceuticals (NASDAQ:ZYNE). On June 30, Zynerba announced that its Zygel CBD gel did not achieve statistical significance in its primary or secondary endpoints for the treatment of Fragile X syndrome. Both GW Pharmaceuticals and Zynerba have shown that CBD isn't the pharmaceutical cure-all that it was seemingly touted to be. 

A half-emptied hourglass on a table.

Image source: Getty Images.

CBD can be a success, but it's going to take time

The fact of the matter is that all next-big-thing investments, including CBD, need time to mature. Keep in mind that this doesn't guarantee CBD will be a long-term success, as the FDA's ongoing guidance will play a key role in determining the ceiling for the industry and CBD stocks. However, it does suggest that patience can pay off for investors in a niche industry that targets a broad audience.

Besides GW Pharmaceuticals, which rebounded strongly from its Sativex failure to see lead CBD-based drug Epidiolex approved by the FDA to treat two rare types of childhood-onset epilepsy, Charlotte's Web (OTC:CWBH.F) appears best-suited to handle any challenges in the CBD space.

Although market share in the U.S. CBD industry is highly fragmented, Charlotte's Web is the current leader, with a presence in more than 12,000 retail locations, including the three largest U.S. pharmacy chains. While the FDA's ruling that CBD not be added to food or beverages was a disappointment, Charlotte's Web has long been a leader in CBD topicals and oils. Thus, the FDA's decision isn't a business model destroyer for Charlotte's Web, or the CBD industry as a whole. 

Furthermore, Charlotte's Web has been greatly increasing its online sales in recent quarters. By shipping directly to consumers, the company may be able to lower its overhead costs and improve margins.

The point is that there can be winners in the CBD space. However, it's going to take time for the industry to mature and for the FDA to produce concrete guidance on a path forward for its use in food and beverages. For the time being, the best suggestion I can offer is this: Be patient.