Whether you believe recreational marijuana should be legal or not, there is plenty of evidence supporting the use of CBD flower and hemp products for health and medical purposes. Growth companies are still hot, and many businesses that sell CBD products are growing rapidly. If you’ve been thinking about investing in CBD companies, here are some things you need to know.
What’s the difference between marijuana and CBD?
The first thing you might be wondering about is the difference between marijuana and CBD. The most significant difference between the two is the fact that CBD is legal in most states in the U.S., while marijuana is still illegal in most of them, especially for recreational use. They both come from the same plant, but they are produced from different parts of the plant.
CBD is legal, and marijuana is illegal in most states because of the amount of THC they contain. THC is the chemical in marijuana that accounts for that “high” feeling, and CBD has very little of it. Instead of THC, CBD contains other chemicals that serve medical purposes in higher amounts. Various strains are grown for different purposes.
How big is the investable market?
The size of the investable market varies, depending on whether you believe in recreational marijuana or not. Many companies that sell CBD also sell recreational marijuana in states that have legalized it. Those who don’t want to invest in recreational marijuana because they see it as an ESG (environmental, social, governance) issue may want to choose their stocks more carefully, so they invest only in CBD stocks.
All you have to do is look around you, and it will become immediately apparent that the CBD market is enormous. Since the 2018 farm bill legalized industrial hemp, CBD products have been popping up all over the place.
Estimates of the size of the investable market in legal cannabis products vary. Some research suggested that the market would surpass $19 billion in 2020. Others put the size of the market at more than $40 billion by 2024. Business Insider reported in 2019 that Wall Street expects the CBD industry to be worth $16 billion by 2025.
Beware the regulatory environment
Anyone who is thinking about investing in CBD should do so with caution. Even though many firms that sell CBD fall into the category of hyper-growth companies, that doesn’t mean they don’t have some regulatory concerns.
The biggest issue has to do with the legality of CBD. While most states have seized on it as the legal part of the marijuana plant, CBD is still in a bit of a regulatory haze. The 2018 farm bill opened the floodgates, paving the way for a multitude of products containing CBD that contain less than 0.3% THC by weight.
One expert told Money that the Food and Drug Administration is looking into regulating CBD products, although it has mostly stayed on the sidelines. Sometimes the agency does crack down on firms that make false claims about the CBD they sell. Local laws also have a major impact on the legality of CBD products. For example, some states require any products containing CBD to be produced within the state. Additionally, some states have not explicitly made CBD legal yet, so hemp-derived products are still in a grey area.
The good news and bad news about the CBD market
Perhaps the best reason to invest in CBD companies is rapid growth. There is a reason that products containing CBD seem to be everywhere. People are buying them, and the market is growing rapidly. The number of stores that sell CBD products has skyrocketed. Even some large pharmacy chains and grocery stores are selling CBD. Topicals have also become popular, although traditionally, they have made up just a small part of the total market.
On the other hand, some of the biggest sellers of CBD products have been warning that their growth has been slowing. For example, CV Sciences warned as early as 2019 that it was having regulatory issues in some states. Despite those warnings, the growth of CBD continued to explode in 2020, so it’s still early in the investment story.
Deciding where to invest in CBD flower companies
Because of the tremendous growth in the legal cannabis business, there are many players in the industry. You might even try to look beyond public companies and target the many private firms that sell CBD flower and hemp products. Private equity has ballooned in popularity, so if you have been thinking about getting into PE, this might be one area in which it makes sense to do so.
When choosing CBD companies to invest in, there are several factors to consider. Not all CBD products are created equal. A wise investor will consider the quality of the products each company makes before they invest. After all, investing in CBD does come with some risk, so it’s essential to choose the companies that will be the most likely candidates to weather any storm if one arises.
Investing in CBD companies can offer tremendous opportunities, but like any investment, you should learn as much about the industry as you can. Warren Buffett always advises investors to only buy into companies they understand, and the same should be true of the CBD industry.
Note: This article originally appeared at ValueWalk. The author is Anna Peel.