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Should you still be invested in ASX marijuana shares?

ASX marijuana shares

‘Pot stocks’ were making headlines in 2018. California, one of the world’s biggest economies and the most populous state in the US, finally enacted legislation to legalise the recreational use of cannabis. It joined a growing list of US states that had already fully legalised weed. Not long after that, Canada came to the party, with Justin Trudeau making good on his 2015 election campaign promise to legalise pot nationally, making the North American country the first of the G7 nations to do so.

Momentum was building, media pundits were talking about the prospect of a new multibillion dollar global pot industry, and even Australian investors were starting to get excited, pumping up the value of Australian marijuana stocks like Auscann Group Holdings Ltd (ASX: AC8) and Cann Group Ltd (ASX: CAN). Everyone was being swept up in a new green wave!

But flash forward about 18 months and the wind has well and truly gone out of the cannabis industry’s sails – and not just here in Australia. The big US and Canadian weed companies like Canopy Growth Corp, Aurora Cannabis Inc, and Cronos Group Inc are all well and truly in the red over the last six months.

The main Australian players, Auscann and Cann Group, both hit new 52-week lows in March of this year. And despite making up some slight ground since then, shares in both companies have been trading more or less sideways, with neither able to really break out of their current rut.

It all just goes to show to what degree investors have lost interest in pot stocks. It’s probably got a great deal to do with market saturation – in 2018 it seemed like a new cannabis company was popping up on the ASX every week.

In addition to Auscann and Cann Group, there was all manner of medicinal cannabis and pharmaceutical companies fighting for a share of the market’s attention. Think Creso Pharma Limited (ASX: CPH), Thc Global Group Ltd (ASX: THC), MMJ Group Holdings Ltd (ASX: MMJ), MGC Pharmaceuticals Ltd (ASX: MXC), Zelda Therapeutics Ltd (ASX: ZLD), Botanix Pharmaceuticals Ltd (ASX: BOT), and Elixinol Global Ltd (ASX: EXL). And that’s not even an exhaustive list!

So is there a silver lining?

The global march towards cannabis legalisation does seem to be progressing, even if it’s not top of the list for our local legislators. Luxembourg recently announced its plans to become the first European country to legalise recreational weed consumption, and it is urging its neighbours in the EU to follow suit.

According to a recent article in the Los Angeles Times, licensed cannabis sales in California in 2019 are expected to hit US$3.1 billion, making it the largest legal marijuana market in the world. This is also a big increase over the US$2.5 billion in sales generated in the state in 2018. The same article states that Canadians are predicted to spend US$1.1 billion on legal cannabis this year.

The point is, the market for cannabis exists and it is definitely growing, and growing fast. The legal market for marijuana in California alone is expected to more than double to US$7.2 billion by 2024. And yet local and international pot stocks continue to flat line.

Recent developments with Creso Pharma shows what might need to happen to enliven the sector again. The Creso share price surged almost 31% higher in a single day earlier this year when it was announced that it would be acquired by Canadian cannabis company PharmaCielo Limited.

With so many small niche companies currently in operation, the sector definitely feels crowded and in desperate need of some more M&A activity. This is particularly true in Australia, where full legalisation still seems a long way away. Given this environment, it’s not unreasonable for an investor to question how the industry can support so many local cannabis companies, particularly over the short term.

Foolish takeaway

My personal opinion is still that this is an industry with a lot of global growth potential ahead of it, although it has demonstrated itself to be particularly risky recently. I still think if you pick your stocks wisely, have a great deal of patience, and maybe get your healthy dose of luck, you could still end up profiting a great deal from cannabis stocks – but you definitely need to have a long-term focus and a big appetite for risk.

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Returns as of 6th October 2020

Motley Fool contributor Rhys Brock owns shares of AUSCANN FPO, Creso Pharma Ltd, and MMJ Phytotech Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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