8 Questions Cannabis Stock Investors Should Ask About CBD

Test your knowledge of cannabidiol.

Cannabidiol, or CBD, was legalized in the U.S. in December 2018, but some investors aren't aware of CBD and its connection to cannabis stocks. Americans have likely noticed CBD gummies, oils and other products popping up in convenience stores, gas stations and even bars in the past six months. The Farm Bill of 2018 removed legal restrictions on CBD derived from hemp. Bank of America analyst Christopher Carey says CBD is a major opportunity for cannabis companies in the U.S. market until marijuana is legalized. Here are answers to eight questions cannabis stock investors have about CBD.

What is CBD?

CBD is a non-psychoactive cannabis-derived compound that has been found to have a handful of positive therapeutic effects. Tetrahydrocannabinol (THC) is the primary psychoactive chemical in marijuana, but CBD is found in both marijuana and hemp. GW Pharmaceuticals (ticker: GWPH) made history in 2018 when its CBD drug Epidiolex became the first cannabinoid approved by the FDA for treatment of epilepsy. While Epidiolex is the only CBD drug approved in the U.S., one Journal of Experimental Medicine study found CBD helped treat inflammation and pain in rats. Other studies have found CBD could help treat addiction, anxiety or other disorders.

Is CBD legal in the U.S.?

In 1970, President Richard Nixon's Comprehensive Drug Abuse Prevention and Control Act added marijuana to the list of Schedule I drugs under the Controlled Substances Act. Despite the fact that hemp contained only trace amounts of THC, hemp was included in the federal ban and was lumped in with highly psychoactive and/or addictive Schedule I drugs such as heroin and LSD. While marijuana remains a Schedule I drug today, hemp was removed from the Controlled Substance Act ban list in December 2018 thanks to the Farm Bill, opening the doors for legal CBD production in the U.S.

What are the U.S. restrictions on legal CBD?

Since CBD derived from hemp has been legal in the U.S. for less than a year, the regulatory restrictions on the compound are still up in the air. CBD falls under the jurisdiction of the FDA, which is expected to provide some clarity on potential restrictions by the end of 2019. Carey says the key development for CBD classification will be FDA interpretation of the Dietary Supplement Health and Education Act of 1994. The FDA could potentially restrict CBD from sale as a "dietary supplement" due to its inclusion in previous FDA drug trials.

Is hemp already being produced in the U.S.?

Since the 2018 Farm Bill, 46 U.S. states have enacted hemp production laws. The number of total hemp acres planted nationwide tripled in 2018 to 78,176, with Montana (22,000 acres) and Colorado (21,578) leading the way. Carey estimates the 2018 U.S. hemp crop could have theoretically produced about 2.5 million kilograms of CBD. If no more than 3% of the U.S. population were consuming CBD and 100% of the hemp crop were converted to CBD, Carey says the U.S. already has the CBD production capacity to meet market demand.

How much is the U.S. CBD market worth?

The latest price estimates for CBD isolate in the U.S. market are $4,574 per kilogram, down from $6,077/kg as recently as April. Carey estimates the current U.S. hemp crop could generate between $9 billion and $20 billion in CBD, depending on factors such as price and yield. Given much of the current hemp crop is being produced for other uses, he says the actual CBD market value is likely much lower for now. U.S. retail CBD prices currently range between 9 cents and 17 cents per milligram, according to Bank of America.

Do Americans care about CBD?

A Gallop study conducted in June 2019 found that 64% of U.S. adults were aware of CBD, while 14% of adults were "very familiar" with CBD. Carey says that familiarity level is extremely high for a product that has only been legal since December 2018. Familiarity is highest among the 18- to 29-year-old demographic, with 18% of respondents reporting high familiarity. Perhaps most encouraging for investors is that about a third of Americans that reported being highly familiar with CBD said they see "a lot of benefits" to the substance.

Where can Americans buy CBD?

U.S. retailers are already launching CBD strategies. In March, CVS Health Corp. (CVS) announced CBD products in 800 stores in eight different states. Competitor Walgreens Boots Alliance (WBA) followed by announcing a similar CBD launch in 1,500 stores in nine different states. In June, grocery chain Kroger Co. (KR) announced it would be carrying CBD products in 945 stores in 17 states and about 35% of its stores. GNC Holdings (GNC), Bed, Bath & Beyond (BBBY) Rite Aid Corp. (RAD) and others have also announced CBD rollouts. Once the FDA clarifies its CBD regulations, other stores may soon follow.

Which cannabis stocks will benefit from CBD in the U.S.?

Carey says the U.S. CBD market could be a huge opportunity for cannabis producers. Canadian grower Cronos Group (CRON) made headlines in August with a $300 million buyout of Redwood Holdings, parent company of popular U.S. CBD brand Lord Jones. In April, Canopy Growth Corp. (CGC) announced a partnership and conditional buyout of U.S. cannabis producer Acreage Holdings (ACRGF). Acreage already has operations in nine U.S. states and a significant CBD market share. Hexo Corp. (HEXO) created a U.S. subsidiary earlier this year and announced plans for CBD distribution in eight U.S. states in 2020.

Questions to Test Your Knowledge of CBD:

-- What is CBD?

-- Is CBD legal in the U.S.?

-- What are the U.S. restrictions on legal CBD?

-- Is hemp already being produced in the U.S.?

-- How much is the U.S. CBD market worth?

-- Do Americans care about CBD?

-- Where can Americans buy CBD?

-- Which cannabis stocks will benefit from CBD in the U.S.?