Cannabis stocks took a beating in 2019. The global cannabis market is small and unpredictable, and so are most cannabis stocks. No matter how big the global cannabis market ultimately gets, it’s likely going to continue to be a bumpy ride for investors for the next several years.
As I’ve written before, I’m generally bullish on the long-term outlook for marijuana stocks. But if 2019 proved one thing, it’s that cannabis investors need to be careful.
I have always recommended investing in a basket of at least four or five cannabis stocks rather than trying to pick winners. That diversification will help mitigate some of the inherent risk of betting on cannabis. Another more aggressive approach to mitigating risk is to make a pair trade. Here’s a look at the cannabis pair trade I prefer.
CBD Versus THC
Most cannabis stock investors already have a basic understanding of cannabidiol (CBD) and tetrahydrocannabinol (THC). For the casual reader, CBD and THC are just two of dozens of different chemical compounds that occur naturally in cannabis. In a nutshell, THC is what gets you high.
THC and CBD are each found in both hemp and marijuana, which are different types of cannabis plants. However, THC occurs in such small amounts in hemp that the U.S. removed the federal ban on hemp in late 2018. That lifted ban opened up the U.S. floodgates for hemp-derived CBD, which doesn’t get you high. However, many people claim that CBD has plenty of other wellness benefits.
But here’s where it gets dicey. The U.S. Food and Drug Administration has officially approved CBD for the treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome in patients two years of age and older. As far as the FDA is concerned, that’s the only thing CBD has been deemed safe and effective to treat.
A look around the internet (or in your local convenience store) will likely reveal CBD products claiming they treat a long list of ailments. Users claim CBD treats cancer, diabetes, arthritis, menstrual cramps, anxiety, psychosis, dry skin, dementia, Alzheimer’s, depression, anger, Crohn’s, ADHD, PTSD, IBS, Parkinson’s opiate addiction, migraines, and general pain. I’m sure there are people out there claiming CBD also treats any other medical condition under the sun.
THC, on the other hand, gets you high.
The Facts on CBD
If you’re a skeptic like me, that list of CBD-treatable conditions seems suspiciously long. Here’s what the FDA has to say about CBD, as of November 2019:
“The FDA has seen only limited data about CBD safety and these data point to real risks that need to be considered before taking CBD for any reason…The agency has warned companies to stop selling CBD products they claim are intended to prevent, diagnose, treat, mitigate, or cure serious diseases such as cancer, Alzheimer’s disease, psychiatric disorders and diabetes.”
In other words, many of the CBD claims are anecdotal at best. As of now, none of them are scientifically proven, as far as the FDA is concerned.
If your uncle Herb says CBD improves his arthritis pain, I’m not calling him a liar. But part of the FDA approval process is making sure these claims have been verified by scientific experimentation that controls for factors such as the placebo effect.
If you secretly replace your Uncle Herb’s CBD oil with K-Y brand personal lubricant, it might also improve his arthritis pain if he believes it will.
Pair Trade with Cannabis Stocks
Personally, my bullish thesis on marijuana stocks has two parts. The first part is that the U.S. is moving on a long-term path toward legalizing marijuana on a federal level. The second part of my bull thesis is that people want to get high.
When it comes to the benefits of CBD at this point, there are few actual scientific facts. But say CBD is eventually proven to be generally healthy. It may end up no different than antioxidants, fish oil or other beneficial supplements.
It seems much of the enthusiasm for CBD is coming from the fact that it’s new and it’s cannabis-related. It’s the cool trend in health these days. But cannabis bulls aren’t looking for a fad. They are looking for real, long-term growth.
I recommend investors go long Canadian legal cannabis producers such as Canopy Growth (NYSE: CGC) stock, Cronos (NASDAQ: CRON) stock and OrganiGram (NASDAQ: OGI) stock. These companies produce products that get people high.
At the same time, investors can pair that trade with short positions in CBD-focused cannabis stocks, such as CV Sciences (OTC: CVSI) stock, Charlotte’s Web Holdings (OTC: CWBHF) stock and cbdMD Inc (NYSE: YCBD) stock. This trade helps isolate U.S. marijuana legalization as a catalyst and potentially mitigate any near-term negative cannabis headline risks.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.