Demand for legal marijuana has increased, helping public pot companies. Even sales of CBD—derived from nonpsychoactive hemp—are expected to grow, although many small brands have gone out of business.

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Key Takeaways

  • A global cannabis index has bounced back to roughly where it was before the pandemic tanked the stock market
  • Dispensaries were declared essential businesses in most states (where legal), helping boost sentiment for the sector
  • Inaction by FDA is seen as constraining growth in the domestic CBD market

Cannabis stocks aren’t flying as high as they once did, but they haven’t gone up in smoke either.

Pot stocks spent the early part of the year before the pandemic in decline thanks to a host of factors, including balance sheet and accounting issues and worries over excessive valuation. They drifted lower until the pandemic took them down more sharply along with the wider stock market.

But weed stocks have bounced back along with the broader market, with the EQM Global Cannabis Index hovering around 30 as of early September 2020—roughly where it was before the first COVID-19 market selloff.

“The industry has been remarkably resilient during this pandemic,” said Matt Karnes, founder of GreenWave Advisors.

According to Alan Brochstein, founding partner with New Cannabis Ventures, there were worries that the coronavirus would be an extinction-level event for marijuana stocks. But it seems it hasn’t turned out that way.

A Boost in Credibility and Demand

Although there have been headwinds, “many dispensaries saw an increase in sales as consumers began to ‘stock up’ on products to limit the number of trips they would have to make,” Brightfield Group research director Kay Tamillow explained in a press release. The market intelligence firm projected the U.S. cannabis market will grow 24% year-over-year to $17.7 billion by the end of 2020.

It was an important boost for consumers and investors alike that cannabis—which is still illegal on a federal level—was deemed essential in most states where it is legal, according to Brochstein.

Although its “essential” status doesn’t mean people who weren’t using cannabis before would suddenly start frequenting dispensaries, the declaration is still a positive for the budding marijuana sector, Karnes pointed out. “It gives credibility to the industry,” he said.

As Brochstein noted, the pandemic has helped demand, as people have had extra time on their hands as well as heightened anxiety. Dispensaries have been providing online ordering with curbside pickup or even delivery, perhaps helping shift demand from the illicit market to legal providers during the pandemic.

Government stimulus money may have also helped boost demand.

Hemp-Based CBD Market Growth Constrained by Pandemic

When looking at the cannabis market, it’s important to remember there’s the legalized-marijuana trade (products containing the psychoactive drug THC), and then there are hemp-based products, which don’t have enough THC to produce a high. These include hempseed oil, which has been around for a while, and cannabidiol (CBD) products, which have gone from rare to ubiquitous in recent years.

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Regarding products that contain CBD, the pandemic has indeed been a “significant extinction event” for hundreds of small brands in the United States, according to Brightfield. But Bethany Gomez, managing director with the firm, said in a press release that it’s a healthy consolidation of the market.

Although 2020 retail CBD sales in the United States will likely fall short of previously anticipated levels because of high unemployment, Brightfield still expects the CBD market in the United States to reach $4.7 billion in sales this year, a 14% increase from 2019.

FDA Approval Still Slow to Emerge

In addition to small brands going out of business, economic pressure on consumers, and temporary store closures, Brightfield said that inaction by the U.S. Food and Drug Administration (FDA) is also constraining growth in the domestic CBD market.

Although the better CBD companies out there have been able to get topical products onto shelves in large chains, they’re not able to sell it in ingestible form over the counter, he noted.

The FDA has approved just one CBD product, which is only available by prescription to treat two rare and severe forms of epilepsy. Marketing CBD by adding it to food or labeling it as a dietary supplement remains illegal.

Still, both the legal CBD and marijuana markets continue to grow despite the pandemic, and it seems that as both markets continue to mature, investors may have plenty of runway to make money in cannabis stocks as long as they do their homework and watch out for snakes in the grass.

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