Marijuana isn't legal in the U.S. and may not be for a long time. But there can be lots of confusion for investors because in some ways, it is legal. And cannabidiol (CBD), the non-psychoactive substance in cannabis that is closely associated with its health benefits, is becoming more mainstream. Recently, Major League Baseball's Kansas City Royals announced a partnership with a CBD company, Pure Spectrum, promoting the health effects of the substance on overall wellness.
Investors, however, should be wary of these types of reports, as they can be misleading and perhaps even suggest that legalization is closer at hand than it really is.
The partnership involves a hemp-based company
The headline about the partnership mentioned a CBD company, as is normally the case. But an important distinction that often gets omitted and that investors may not have noticed is that the Royals partnered with a business that makes hemp-based CBD. It's a small but significant difference.
Hemp and marijuana plants are part of the same species, but with hemp, users aren't going to get a high from it; it contains no more than 0.3% of tetrahydrocannabinol (THC), the psychoactive substance in cannabis.
The U.S. government legalized hemp as part of the Farm Bill in 2018. There's nothing illegal about using hemp-based products. But because both hemp and marijuana products can contain CBD, it can be confusing to investors and consumers alike when they read headlines saying that a company is selling CBD products or that there's a big sponsorship involving CBD.
Marijuana products are legal in some states,not the federal level
What complicates this even further is that marijuana-based products, including those containing both CBD and high levels of THC, are legal in some states. But federally, marijuana remains illegal. What that means is that while marijuana is legal in Washington and Oregon and you can consume marijuana within those states, you cannot legally cross from one state into the other with the substance.
Technically, the federal government could crack down on marijuana use in any state but it has opted not to do so, effectively letting individual states decide whether they want to permit it or not (without openly stating that).
All this means is that as long as marijuana remains illegal at the federal level, investors shouldn't expect to see a baseball team or any other big company partnering with a U.S.-based marijuana business. Hemp-based CBD partnerships are fine, but once you're talking about marijuana products, which contain higher levels of THC, that's a whole other ball game.
One notable exception involves Constellation Brands, which has invested in Canada-based pot producer Canopy Growth (CGC 2.41%). Because recreational marijuana is legal in Canada, that doesn't run afoul of U.S. laws.
Betting on legalization is a risky option for investors
Many investors have bought shares of Canada-based marijuana companies such as Tilray Brands (TLRY 1.71%) and Canopy Growth that are chomping at the bit to get into the U.S. cannabis market. If the U.S. does legalize marijuana, shares of those beaten-down marijuana stocks would definitely rise because it would open up more growth opportunities for those businesses. Both Tilray and Canopy Growth have been struggling to increase their sales over the past year:
Data source: YCharts
Tilray's growth rate was a bit elevated in 2021, but that was driven in large part due to its merger with rival Aphria. Investors should be aware that the big opportunity for these companies is to expand into other markets and countries, as there is too much competition in Canada for there to be much more growth without coming at the cost of drastically reducing already thin margins.
Unfortunately, for these businesses, legalization isn't inevitable in the U.S., even if CBD products and sponsorships become more common.
Unless you're willing to saddle up and hold on to these stocks for years and years, hoping that the U.S. government might come around and legalize marijuana, you're better off pursuing companies with better growth opportunities.
