The Big Cloud Hanging Over Cannabis Stocks

Already sharply down from their 2019 highs, cannabis stocks face major volatility and more potential declines ahead. While there is growing support for progress on cannabis regulation, there is also great uncertainty over how U.S. legislators will proceed in regulating both therapeutic CBD, as well as THC, the compound in cannabis which causes the psychoactive “high” that many associate with the plant, as outlined by Business Insider.

Last week, cannabis companies including Tilray Inc. (TLRY), Cronos Group Inc. (CRON) and Curaleaf Holdings Inc. (CURLF) took a hit after a hearing with the Senate Committee on Agriculture, Nutrition and Forestry entitled “Hemp product and the 2018 Farm Bill.” CBD, a cannabinoid derived from the cannabis plant that is used to treat a variety of chronic illnesses and health issues, was made legal by the 2018 Farm Bill. However, companies are waiting on the Food and Drug Administration to release guidelines on marketings and sales of CBD products. 

Governments around the world have been unable to keep up with the rapid growth of the cannabis industry. Some market watchers estimate that the total cannabis market could generate as much as $94 billion in sales per year. The CBD industry alone is seen skyrocketing to $16 billion by 2025, compared to the legal marijuana market expected to grow to $66.3 billion over the same period, per BI. 

“Everyone is begging for regulations,” said Bethany Gomez, the managing director of market research and predictive analytics firm Brightfield Group. “There’s still a lot of confusion and a lot of legal gray areas surrounding those products.” 

Martin Lee, the director of Project CBD, echoed this sentiment. “It is unclear what the road ahead will look like,” he said. “We’re in the midst of a pro-cannabis cultural shift, CBD has played a part of accelerating the speed of that shift.” 

For example, it’s still illegal for banks and financial institutions to work with cannabis companies, even though a Congressional bill to reverse this has bipartisan support. As for CBD, products containing the non-psychoactive compound cannot be sold over state lines, and products with CBD cannot be marketed as a health or dietary supplement. This makes it difficult for the CBD companies selling their products to accurately describe to their customers what they offer, per BI. 

Curaleaf shares fell last week after the FDA sent the company a letter indicating that some of its products don’t have approval to be sold in the U.S. This came after mega-retailer CVS Health Corp. (CVS) made an announcement that it was pulling Curaleaf products from its stores.  

It isn’t just Curaleaf that’s had its business hampered by government regulations. In 2017, Charlotte’s Web Holdings, formerly known as Stanley Brothers, got a similar note from the FDA, and earlier year, PotNetwork Holdings received a letter from the FDA. 

“It’s a delicate tightrope for those companies to walk,” said Gomez. 

Recent confusion in the regulatory space has attributed to weakness in cannabis stocks. Shares of Tilray are down 87% from their highs, compared to Cronos down 45%, Canopy Growth Corp. (CGC) down 46%, and Curaleaf lower 33%. 

While cannabis stocks remain at the mercy of major swings based on regulatory developments, the consensus in the industry is that is not a question of “when” legalization will occur but “how.” The fact that the industry is moving in the direction of legalization, however it happens, positions the leading cannabis companies to profit off of a growing international demand. 

This explains why major corporations such as Amazon.com Inc.’s (AMZN) Whole Foods Market and legacy beverage giant Coca Cola Co. (KO) have indicated that they are considering entering the market. Meanwhile, leaders in industries like tobacco and alcohol, such as Constellation Brands Inc. (STZ), Heineken N.V. and Molson Coors Brewing Co. (TAP) have all made major investments either with cannabis partners or in their own CBD or THC products.