There’s bad news brewing for some cannabis stocks. Even as cannabis rescheduling efforts continue, a key segment of the wider market is coming up on massive disruption: a hemp ban.
Hemp is a low- or no-THC cannabis crop, used for decades in textile work and many industrial processes. But, in 2018, the United States Farm Bill created a loophole via a loose definition of hemp that ultimately gave rise to a $28 billion grey market that includes intoxicating hemp derivatives like delta-8 THC, delta-9 THC, and, in some cases, even popular CBD products.
A Farm Bill 2024 amendment seeks to close that loophole, threatening grey market operators and possibly hurting legitimate companies. The newly restrictive definition includes all cannabinoids “synthesized or manufactured outside of the plant.” In other words, the wide-ranging hemp ban effectively restricts legal hemp usage to non-consumables.
While these companies are fully above board, the amendment (already approved by the House) could put greater regulatory pressure on their operations. Worse yet, these companies are already struggling to keep their heads above water in a saturated market, and this hemp ban could be the final nail in their coffin.
cbdMD (YCBD)
cbdMD (NYSEAMERICAN:YCBD) is almost certainly going to struggle if the hemp ban proceeds further; unlike other hemp stocks, cbdMD sells delta-9 THC products explicitly targeted by the hemp ban. The company made news in recent years after former CEO Martin Sumichrast faced fraud charges after the SEC alleged that he manipulated “figures in cbdMD’s balance sheet to boost the value of a stock offering, and [double] Sumichrast’s salary.” The SEC and Sumichrast settled the suit in April. Though the terms aren’t yet disclosed, the entire ordeal casts a bad light on an already struggling organization that may go fully under following the hemp ban.
The company’s second-quarter results reinforce the hemp stock’s shaky standing. Sales decreased 30% year-over-year, marking just $4.4 million in total revenue. Likewise, its net loss expanded to $4 million, and management took on an additional $1.54 million in debt via a convertible note offering. Ultimately, cbdMD is already on shaky ground. The emerging hemp ban may make its operations go up in smoke.
Charlotte’s Web Holdings (CWBHF)
While less explicitly impacted by the hemp ban, Charlotte’s Web Holdings (OTCMKTS:CWBHF) may face an uphill battle. The company’s core CBD offerings come from hemp. This means that they may fall under the “synthesized or manufactured outside of the plant” category of the Farm Bill amendment.
Like cbdMD, Charlotte’s Web Holdings faced governance issues in recent years; activist investors staged a revolt that saw company CEO Jacques Tortoli replaced in 2023 because, in the words of co-founder Joel Stanley, “The truth is that the actions of this board have clearly contributed to the destruction of shareholder value.”
While it’s only been about six months since the revolt, the company’s operational standing hasn’t improved much and could fall further as the hemp ban progresses. Like cbdMD, sales slumped significantly in the company’s recent quarterly report, with revenue falling 29%. The company’s sole saving grace in light of the emerging hemp ban may be its longstanding partnership with Major League Baseball, as the league likely has some clout and pull with legislators — but don’t count on it.
Innovative Industrial Properties (IIPR)
In the long run, I’m bullish on Innovative Industrial Properties (NYSE:IIPR). The cannabis REIT is unique among peers in that, rather than growing, distributing, or selling cannabis products, it owns more than 100 properties at 98.5% occupancy tailor-made to house and support cannabis companies seeking safe, secure and tech-centric growing operations. I think IIPR’s long-term prospects are strong amid rescheduling, but the hemp ban may present a short-term hit to the company’s bottom line if existing tenants are unduly affected by the amendment.
Unfortunately for investors, Innovative Industrial Properties doesn’t list its tenants by name or by product offering. This creates an air of uncertainty that could prove devastating. In this case, investors will likely shy away from an outright hemp ban’s operational risk, as we don’t know how much it will affect tenants. I’d keep a close eye on IIPR moving forward; the company’s current 6.7% total yield and low price-to-book ratio are attractive now but may not be sustainable in light of a hemp ban. Only time will tell, but the best-case scenario (in my mind) is a small drop following the hemp ban, presenting a buying opportunity for patient investors.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.