The ABCs of investing in CBD
- Cannabidiol, more widely known as CBD, is the nonpsychoactive chemical in cannabis sativa
- Outside of the medical community, companies are putting CBD in all kinds of products — cold brew coffee, hamburgers, chocolate — you name it
- There’s been an increasing interest in investing in CBD companies
Consumers have long been interested in the nonpsychoactive chemical in cannabis sativa, cannabidiol, more widely known as CBD. With the passage of the 2018 U.S. Farm Bill legalizing hemp-derived CBD nationwide, more companies are entering the marketplace to offer myriad CBD-laced products that tout everything from pain-relieving properties to lessening anxiety. As interest in going into the CBD business has grown, so has investing in that growth. But as with all potential opportunities, investing — especially in a new concept that has legal parameters — comes with its own set of risks.
CBD was all the rage — even before the Farm Bill
Also called the Agriculture Improvement Act of 2018, the Farm Bill legalized hemp thanks in part to Kentucky senator Mitch McConnell’s Hemp Farming Act of 2018. (He’s staunchly anti-cannabis but not anti-hemp, as the plant could “play a key role in the economic future of Kentucky and the nation,” says a press release from his office.) Farmers can now grow hemp, and businesses can take advantage of hemp-derived CBD’s declassification as a Schedule I drug.
Brooke Alpert, co-founder of New York-based CBD company Daily Habit, says mainstream consumers are just finding out about CBD’s possible benefits. There are a couple reasons behind its appeal, she says: One, it offers a potential alternative to certain prescription medications, with fewer side effects.
“Two, we have a new hierarchy of success when it comes to health and wellness,” says Alpert. “No longer are we bragging about how little sleep we got or how many hours we’re working, instead the new currency is: ‘How well can you take care of yourself or invest into self-care?’”
There are few studies on CBD’s health benefits, but what’s been found is promising. Harvard Medical School writes that research suggests CBD can relieve anxiety, insomnia, and chronic pain. Most notably, the Federal Drug Administration (FDA) approved CBD-based Epidiolex by company GW Research Ltd. in June 2018. The drug is used to treat some rare forms of epilepsy in children over the age of 2.
Outside of the medical community, companies are putting CBD in all kinds of products — cold brew coffee, hamburgers, chocolate — you name it. With U.S. CBD sales projected to grow to $20 billion by 2024, according to research company BDS Analytics, investing in CBD companies could be a good option for some investors.
Before you invest, consider the risks
Hemp-derived CBD is federally legal but that doesn’t mean all products are OK to invest in, let alone use. Make sure your investment of choice follows the laws, stays ahead of changing regulations, files with the U.S. Securities and Exchange Commission (SEC), and meets other qualifiers.
One of the things investors might need to be wary of is CBD products that don’t comply with regulations and laws. The FDA requires CBD products to abide by the Food, Drug and Cosmetic Act (FD&C Act) and other applicable laws in order to be sold on the market.
Changing laws could also get in the way of CBD investments, writes cannabis industry analyst Alan Brochstein in Forbes. California’s cannabis industry, for example, went under three phases of regulatory changes in 2018.
“Investors need to understand that the regulatory landscape is in flux, though it appears to be headed in the right direction,” writes Brochstein. He emphasizes the importance of investing in companies that file with the SEC. The popularity of CBD has come with plenty of opportunists, Brochstein says (as do most things when they hit the mainstream).
“Many of the publicly traded companies don’t appear to be real, with several trading on the (off-exchange trading) that don’t even file with the SEC, including one of the first ‘public’ companies in the space, Medical Marijuana, Inc.,” writes Brochstein. “While some of these appear to be more substantive than others, a sudden change in business models is certainly a yellow flag, and investors should be slow to credit companies for just simply stating their intentions.”
David Metzler, CEO of California-based CBD investment firm CBDCapitalGroup (CCG), says that product quality is the No. 1 risk when investing.
“That’s why we only buy companies with a Certificate of Analysis from quality labs we trust, and we require our portfolio companies to track each individual product’s quality and make that available to all of their customers,” says Metzler.
Cannabis news publication Leafly says there are several questions you should ask yourself before investing in a CBD company: Did the company file with the SEC? Is it generating significant revenue? What’s the source of its CBD and its production methods? Are its products independently evaluated? If you can’t answer these questions, you might want to do more research on the company before investing.
The ‘best’ companies to invest in depend on your investment goals
Investing in CBD versus other companies that make products with tetrahydrocannabinol (THC, the psychoactive chemical in cannabis) isn’t necessarily better, says Metzler. That choice is dependent on your investment goals.
“At CCG we choose to invest only in CBD because that allows us to legally ship nationally with all of our brands, allowing us to create efficiencies of scale on fulfillment and back end operations,” says Metzler.
Cannabis products that aren’t hemp-derived CBD aren’t legal in all 50 states yet. Investing in companies with THC products might be slightly more limiting if your goals are similar to Metzler’s.
As far as the “best” companies to invest in, there are various opinions online about who might be the best. Basically, investing in profitable companies is best, says Metzler. If you can’t find some, then look for companies with good monthly recurring revenue or return customer purchase offers.
“We see that as a proxy for their product’s efficacy and quality, which is very important to us,” says Metzler.
For those interested in publicly traded companies, Metzler says GW Pharmaceuticals (GWPH), Tilray (TLRY), and Canopy Growth Corporation (CGC) are just a few options.
How to invest in CBD companies
First, understand that any kind of investing comes with risks. Investing can lead to loss of money — past stock performance is not a guarantee of future price appreciation. Investors are advised to do their own independent research into stocks. If you want to get started with investing in CBD, Metzler says there are the public stocks or investors could wait until the public U.S. market opens up. (That’ll likely be in 2020, he says.)
Several publicly traded companies offer the ability for anyone to get into investing, but an article in Leafly suggests remaining vigilant. Although a company might be publicly traded, it might have major red flags. If you’re not sure what those might be even after you’ve done your research, speak with a professional financial adviser to help.
“I would strongly recommend hiring experts like we did to help you learn the space … and choose the right companies,” says Metzler.
Simply put — the more you know, the more confident you can be investing your money. But remember, every investment comes with risks.
Finance101 and Lara McCaffrey have no position in the stocks mentioned.