Why the Farm Bill Could Send Pot Stocks Soaring

Canopy Growth Corp (TSX:WEED)(NYSE:CGC) has struggled lately, and the stock could be a good buy on the dip.

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There hasn’t been a lot to be excited about in the cannabis industry lately. Stocks have given back many of their gains for the year and some are even in the negative. And while we’ve seen some deals with other industries, there is still a lot of hesitation for big companies to get involved in cannabis.

However, last week there was some big news that came out of the U.S. that could open up some opportunities. The farm bill was passed by Congress and now just requires the U.S. president’s signature before coming into law.

What is the farm bill and why does it matter to cannabis investors?

The farm bill makes cultivating hemp legal for any purpose, and that’s significant for the industry. What it means is that cannabidiol (CBD), the non-psychoactive compound in cannabis that is used for medicinal purposes, can be extracted legally.

Investors should note that this doesn’t mean all forms of CBD are legal. In fact, it relates strictly to CBD that has been derived from hemp, which has little to no tetrahydrocannabinol (THC) — the compound that gives cannabis users a high.

That’s why hemp is looked upon more favourably than marijuana. Although it is part of the same plant, marijuana has higher amounts of THC.

For the medical marijuana segment, this is a big deal as it will open the door for more CBD products on the market (those derived from hemp).

That being said, individual states will still be able to regulate CBD and some may not choose to allow it, even though the federal government has (which is in stark contrast to some states that have permitted pot for recreational use while the feds still prohibit it).

What’s next for the industry?

We’ve seen deals involving cannabis companies and other industries thus far, with Canopy Growth (TSX:WEED)(NYSE:CGC) and Constellation Brands perhaps having the most popular partnership in place.

The deal, which could see Constellation take a controlling interest in Canopy, helped give the pot stock a big boost on the news, although things have slowed down since then.

What we could see in light of CBD-derived hemp becoming legalized is more players entering the industry. Canopy Growth is an industry leader, and it’s possible it could line up another big investor that’s looking to move into the cannabis space.

We could see many more mergers and acquisitions take place now that the doors have opened a little for cannabis. What’s been holding Canopy Growth and its peers from entering the U.S. industry have been the legal barriers, and while CBD is still not entirely legal yet, this bill creates the hope that cannabis is at least going in a positive direction.

As a result, we could also see Canopy Growth look to potentially acquire some U.S.-based companies that are involved in cultivating hemp, since that would technically not run afoul with U.S. laws anymore.

Bottom line

The hemp bill creates lots of opportunities in the industry, and it could be an exciting time to invest in cannabis. With Canopy Growth being nowhere near its recent highs, the stock could have a lot of room to run in the weeks and months to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

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