As an integral component of Americana, Coca-Cola (NYSE:KO) doesn’t really generate much news. And in recent years, analysts have discussed KO stock more for its underperformance than anything positive. While Coca-Cola stock earns respect for turning around its business and making its products relevant to today’s youth, the soft-drink sector is extremely competitive.
But a statement released Monday could seemingly change how we view the company. Plus, it could spark a new reason to invest in Coca-Cola stock. According to a CNN Money report, the renowned beverage-maker announced that it is “closely watching” the cannabidiol (CBD) market. The end goal is to produce a “functional wellness” beverage.
Although a surprising move, Coca-Cola has been pondering the move into CBD for some time. The iconic firm approached Aurora Cannabis (OTCMKTS:ACBFF), one of the top marijuana companies, for discussions. Although both organizations won’t publicly comment, Aurora had previously expressed interest in cannabis-infused drinks.
The issue concerning a beverage-maker moving into the marijuana sector isn’t without precedent. The best example we have is Constellation Brands (NYSE:STZ). Perhaps best known for producing Corona beer and Svedka vodka, Constellation has had a significant stake in Canopy Growth Corp (NYSE:CGC). Last month, STZ announced an additional $4 billion investment in the marijuana company.
As it relates to KO stock, the move could be a lucrative one. According to the Pew Research Center, 61% of Americans favor marijuana legalization. The sentiment has clearly reversed from just ten years ago.
Moreover, our northern neighbor became the first G7 member state to legalize recreational marijuana. Management probably has an eye on experimenting with the Canadian market before assessing the domestic situation.
A CBD drink could boost Coca-Cola stock. But on another hand, I view this as a distraction. Here’s why:
KO Stock Isn’t Exempt from Schedule I status
Marijuana advocates will scream until their lungs give out that CBD isn’t psychoactive. They’re correct. They’ll also rant and rave about the many medical benefits associated with CBD. Although we don’t have definitive consensus, available research suggests CBD is a promising therapy for multiple ailments, including cancer.
But none of this matters because of the Schedule I classification. Under this archaic, and dare I say asinine, technicality, the federal government considers any cannabis derivative as dangerous as heroin. Other Schedule I drugs include LSD, ecstasy and peyote. In other words, no company would mess around with this classification.
Now, I’m a firm believer that cannabis will be declassified or at least brought to a lower restriction level. Perhaps, Coca-Cola’s stated interest in agricultural pursuits can help change minds. Undoubtedly, though, it will be a process. Thus, I wouldn’t jump on KO stock hoping for it to be a viable cannabis play.
Coca-Cola Stock Could Suffer a PR Backlash
While the majority of Americans support legalization, that doesn’t necessarily mean they support willful consumption. It just means that they don’t want the government policing morality or butting into people’s private lives. I’m sure many people fall under this category.
We must also consider that 39% of Americans not supporting legalization represents a substantial figure. Moreover, if we breakdown legalization sentiment by political party, we come across expected differences. John Boehner’s foray into weed notwithstanding, most Republicans want the status quo for cannabis (ie. keeping it extremely illegal).
Therefore, Coca-Cola moving into CBD drinks could lift sales in liberal or progressive areas, thereby boosting KO stock. However, it will likely come at a public-relations cost. Let’s get real here: Coca-Cola is a family drink. The idea of CBD beverages just doesn’t fly with the company’s image.
And before you dive into the granularity that soft drinks are unhealthier than smoking weed, my response is this: who cares? It’s not about what’s real but rather, the customer’s perception. Moving into weed allows rival PepsiCo (NASDAQ:PEP) a morality leverage.
Personally, I think it’s an interesting concept, but the risk-reward picture for Coca-Cola stock is cloudy.
KO Stock Risks Becoming Overly Complicated
My third and final reason why I’m not so sure about this green venture is the legal and administrative aspect.
Suppose that the feds knock CBD off the Schedule I list. That’s only a partial victory. Cannabis must not belong on any list for this botanical beverage to spark a revival in KO stock.
And that part is really unlikely. The government will assign cannabis to some kind of list. This new classification will still require companies jumping over bureaucratic hoops. Such a move would steal the thunder out of a groundbreaking strategy shift.
Put another way, KO stock becomes a complicated investment. Right now, the worst thing that Coca-Cola can do is to put more sugar than necessary in their drinks. But with cannabis? You’re inviting headaches.
Ultimately, I really dig how management has sparked momentum in a lagging company. But if you want to invest in cannabis, go with a direct cannabis play. KO stock remains a beverage play, and that’s what its investors should focus on.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.