For years, there wasn't a hotter industry on Wall Street than marijuana. Reminiscent of the dot-com boom of late 1990s and early 2000s, a blindfolded investor could throw a dart and have chosen a winner. Promises of expanded capacity, international exports, and acquisitions often proved more than enough to send cannabis stock valuations into the stratosphere.
But the thing about next-big-thing investments is they all need time to mature. Over the past 16 months, the pot industry has hit one heck of a speed bump, and the vast majority of cannabis stocks have lost a significant amount of their value.
What's more, we've seen three of the hottest trends within the marijuana industry completely fizzle out, at least for now.
Infused beverages go flat
To begin with cannabis-infused beverages have completely gone flat.
As some of you might recall, one of the hottest marijuana plays in 2018 was NewAge (NBEV), which you might know better from its previous name, New Age Beverages. The company announced in September 2018 that it would be introducing a line of cannabidiol (CBD)-based health drinks under the Marley brand-name. In response NewAge's share price skyrocketed 500% in a matter of weeks. However, multiple delays haven't allowed NewAge to launch its supposedly game-changing growth products in the U.S., and its share price completely retreated (and some) back to its preannouncement levels by the March 2020 crash.
The largest marijuana stock in the world by market cap, Canopy Growth (CGC -2.83%), hasn't found the going any easier. Canopy has received four separate direct or indirect investments from spirits giant Constellation Brands (STZ 0.14%), and the expectation had long been that this duo would become a clear-cut leader in infused beverage production in Canada. Yet, when derivative products launched in Canada in mid-December 2019 -- two months later than expected, might I add -- neither Canopy nor Constellation Brands were prepared to launch their beverages at scale.
Canopy Growth and Constellation Brands will no doubt begin making headway in infused beverages as more retail locations open up throughout Canada. But it's going to take time before this cannabis category offers the growth potential Wall Street initially expected of it.
Vapes go up in smoke
Cannabis stock investors have also watched the promise surrounding vapes go up in smoke, at least in the early going.
In the United States, vape sales took hit when, for a period of approximately six months in 2019, more than 2,000 cases of a mysterious lung illnesses were attributed to vaping and electronic cigarettes. The Centers for Disease Control and Prevention eventually labeled vitamin E acetate as the culprit of these lung illnesses. While vitamin E acetate is typically found in illicit products, sampling found that vitamin E acetate was also showing up in a small number of legal-channel vape products. Suffice it to say, this vape-health scare put a real damper on near-term vape demand, especially in the United States.
This was followed by select provinces in Canada temporarily banning vape product sales, even after federal regulators in Canada gave vapes the thumbs-up. Both Quebec and Newfoundland & Labrador have completely banned the sale of cannabis vape products. Meanwhile, Alberta had a vape ban in place that was eventually lifted after two months.
Health scares and regulatory hurdles aren't making life easy for Cronos Group (CRON -0.91%), which, with Altria Group (MO 0.55%), was expected to become a vaping giant. Altria invested $1.8 billion into Cronos in mid-March 2019 to nab a 45% stake in the company, and the expectation was that it would use its marketing and development knowledge in the smokable product space to aid Cronos in developing and launching cannabis vape products. However, between an inadequate dispensary presence throughout much of Canada and these regulatory concerns, the Cronos-Altria pairing hasn't yielded the desired results.
CBD gets a thumbs-down from the FDA
Finally, marijuana stock investors have watched as interest surrounding CBD has dried up considerably over the past year.
With President Trump signing the Farm Bill into law in December 2018, thereby legalizing the industrial production of hemp and hemp-derived CBD, it was widely expected that CBD would become a $22 billion industry by 2022, according to the Brightfield Group. But sales of cannabidiol-based products have struggled, and the U.S. Food and Drug Administration (FDA) is squarely to blame.
Throughout 2019, the FDA was reviewing CBD's risks and benefits, with the eventual goal of producing a guideline on CBD as an additive to food and beverages. However, in late November 2019, the FDA put its foot down on CBD as an additive -- at least for now. A consumer update from the agency cautioned that CBD "has the potential to harm you" and that it "can cause side effects that you may not notice." Former FDA Commissioner Scott Gottlieb notes that it can take years to create a risk-versus-benefit profile for a food/beverage additive. Because CBD is such a complex compound, it could take even longer.
Without being able to add hemp-derived CBD to food and beverages, a significant chunk of the CBD market has been put on the shelf for the time being, which is why companies like Charlotte's Web Holdings (CWBHF -0.76%) have been clobbered.
For Charlotte's Web, the FDA's decision is far from a death sentence, but it's certainly a growth inhibitor. Charlotte's Web's presence in more than 11,000 retail stores its primary reliance on CBD oils and topicals should help the company navigate its way through a temporary rough patch.