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2 falling ASX cannabis stocks to watch closely

As the legalisation of cannabis has proceeded in fits and starts worldwide, it has created plenty of opportunity for investors. We’ve had the rare chance to get in early on an industry that didn’t exist — or not legally, at least — just a few years earlier.

However, cannabis investors are reliant on legalisation continuing to progress. Many cannabis companies seem to be valued by investors on the assumption that more US states will hop on the bandwagon, along with other nations. Australian-based producers, meanwhile, are in the awkward position of exporting many of their products to the US, but only being able to sell a limited few at home.

All of that makes investing in the cannabis market a speculative game. We’ve seen in recent years that the gains on offer can be tremendous, for those willing to take the risk. Elixinol Global Ltd (ASX: EXL) and Althea Group Holdings Ltd (ASX: AGH) are two of Australia’s leading cannabis stocks, and could be the perfect place to start.

Elixinol paying for growth

Elixinol Global was created when Aussie hemp food and cosmetics producer Hemp Foods Australia merged with the US CBD dietary supplement and topical treatment specialist, Elixinol LLC, in January last year. The combination has proved to be a potent one, with Elixinol Global reporting a 19% growth in revenue in first half 2019. It saw a slight loss in profits as it went on a spending spree to develop new products, drive brand awareness, and on market research and new staff.

This marketing spend has been enabled by hemp products recently being de-scheduled from the Controlled Substances Act in the US. Elixinol is projecting massive growth in the hemp and CBD market in the US in years to come, with the CBD market size estimated to double from US$3 billion to US$6 billion, according to the company’s FY19 results presentation.

The company’s heavy spending in 2019 curtailed profits, which may be the reason that the Elixinol’s share price has been weak. Elixinol shares are down 4.76% for the day, at time of writing, to $2.20. That’s significantly down from the all-time high of $5.31 on 17 May this year. However, the short-term pain could represent a fantastic buying opportunity if Elixinol’s strategy pays off. Investors with a longer view who are willing to ride out these falls could be rewarded in spades when Elixinol’s product development and marketing translates into a turnaround in profits.

Rapid growth for Althea

Althea Group is a much more tightly focused cannabis company, producing purely medical cannabis products. Althea’s goal is to educate healthcare professionals on the benefits of cannabis-based medicines, and thus increase the number of its products being prescribed. For that reason, the company tends to measure its success in terms of the number of patients being prescribed its products, within its own reporting documents. In this year’s annual report to shareholders, Althea noted that it had seen significant growth in this measure. In October 2018, the company first hit 100 patients. By 30 June 2019, that number was well over 1,000.

Althea’s stated goals are to reach a 5,000 patient milestone in the short term. The company is expanding into the UK with its medical products, and through acquisitions into Canada, where it will broaden its focus to serve the recreational market as well as medical.

Althea saw significant share price growth this year, from as low as 19 cents in December 2018 to a high of $1.23 on 15 July. The Althea share price has since pulled back, falling to 75 cents on 16 August before bouncing somewhat. In today’s trading Althea shares are down 1.21% at time of writing to 82 cents. The Althea share price could be stabilising from here, providing a good entry point, but with a market cap of just $191.4 million and in such a new, volatile industry, investors should be aware that Althea is a highly speculative investment.

If you're not sold on the cannabis sector, here are five cheap growth shares to consider instead.

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Motley Fool contributor Tyler Jefferson has no position in any of the stocks mentioned. 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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