Cannabis stocks are falling today on news that new regulation may be looming in 2023. Recent reports indicate the Food and Drug Administration (FDA) is planning a review of hemp-derived products including cannabidiol (CBD). Scheduled for the first few months of the year, this review could result in new regulatory policies. After a difficult quarter, cannabis stocks don’t need more turbulence. But that may be exactly what is in store if the review moves forward. Shares of some of the sector’s leaders are tumbling today as the pending review casts a dark shadow of uncertainty over the industry’s future.
Let’s take a closer look at the possible regulation and what it means for investors.
What’s Happening With Cannabis Stocks
As the pending FDA review continues to trend, cannabis stocks are far from in the green. Names both big and small have been steadily trending downward since markets opened. Hexo Corp (NASDAQ:HEXO) is down nearly 1% for the day but is still outperforming some of its peers. Fellow penny stock Aurora Cannabis (NASDAQ:ACB) has fallen 1.9% so far and meme stock Tilray (NASDAQ:TLRY) is down 2.5%. These companies were already unstable before the FDA’s announcement. Now they will be heading into 2023 at an even greater disadvantage.
According to the Wall Street Journal, this review is prompted by concerns regarding public safety and CBD. More specifically, it centers around how the hemp-derived oil is used in food such as edible pastries. Janet Woodcock, the agency’s Principal Deputy Commissioner addressed them, stating:
“Given what we know about the safety of CBD so far, it raises concerns for FDA about whether these existing regulatory pathways for food and dietary supplements are appropriate for this substance.”
The agency’s cannabis strategy office is headed by Patrick Cournoyer, who also highlighted public safety concerns. Cournoyer noted the agency wants to determine the effects of CBD on future fertility, raising the question of whether it can be safely consumed during pregnancy. A chemical compound, CBD is one of the primary ingredients in cannabis. However, unlike another major component, tetrahydrocannabinol (THC), it causes no high or psychoactive effects on its own.
Cannabis stocks saw a significant bump earlier this year when the White House took steps toward legalizing the product on the federal level. But since then, the momentum that drove them up has stalled, leading to considerable doubt regarding the future of the industry. As InvestorPlace writer Shrey Dua reports, investors appear to be losing faith in the sector. He notes when the Secure and Fair Enforcement (SAFE) Banking Act recently failed to pass for the third time, it pushed cannabis stocks down even further.
What Comes Next
Other experts have expressed similar takes. InvestorPlace senior investment analyst Luke Lango recently raised further concerns about cannabis stocks, citing “commoditization and lack of profitability” as the reasons for his bearish stance. He made this case at a time when the sector was gaining. Now that it is facing further regulation, its profitability is called into question even more.
While the future of the cannabis sector remains uncertain, there’s no denying it is facing significant headwinds as it prepares for a new year. Even if markets rebound in 2023, cannabis stocks may not be among the winners.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.