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Why this beaten-down ASX cannabis stock is turning around

The Elixinol Global Ltd (ASX: EXL) share price has had a rough 2019, falling from highs of $5.69 on 9 April to as low as $2.12 on 12 September. However, EXL shares began to bounce last week. Today, the stock is up 2.71% at the time of writing, to $2.27.

Is this the beginning of a turnaround for Elixinol Global?

Background on Elixinol Global

First, let’s look at what Elixinol is, as a hybrid of several companies. Founder and Chief Innovation Officer, Paul Benhaim, recently put it like this:

Elixinol Global was founded early in 2018 when it listed on the ASX to take over three companies that I founded. The first is Elixinol itself, which is based in Boulder, Colorado, and is one of the leading global hemp CBD producers.

The second company is Hemp Foods Australia, which was the first and the largest certified organic hemp foods producer in the Southern Hemisphere.

And the third, which is why we listed, was to raise funds for a startup medical cannabis company called Nunyara, which has applied for its cultivation and manufacturing license. It’s got one of those already recently, a manufacturing license for medical cannabis.

These three differing approaches to legal cannabis products give Elixinol flexibility, but as we’ll see, the company has been dedicating much of its attention, and money, to just one.

An expensive path to growth

Elixinol Global reported 19% growth in revenue in first half of 2019. It saw a slight loss in profits due to a spending spree to develop new products and drive brand awareness, and on market research and new staff.

Much of the marketing spend came as hemp products were de-scheduled from the Controlled Substances Act in the US. As Paul Benhaim explained:

When President Trump signed the Farm Bill at the end of last year, that really opened up the possibilities for industrial and hemp. In the US, we are now waiting for the FDA to give clarification of which markets and which end products will be appropriate for expanding CBD products in. So the regulatory changes have not yet finished and continue to expand and grow, but only in a positive manner so far.

Elixinol is expecting significant growth in the US hemp and CBD market. They estimate the CBD market size will double from US$3 billion to US$6 billion. With Elixinol’s US sales now making up the largest portion of the company’s revenue, and the main focus of its marketing, it should be well-positioned to benefit from this rapid growth in the market.

However, while this heavy marketing spend is building the company’s long-term prospects, it severely hampered profits this year. That could be a large part of why the share price has fallen so hard throughout recent months.

So, is Elixinol a buy?

Investors should be warned, the legal cannabis industry is a volatile and speculative place to invest. Australian companies working in this sector find themselves in the strange position of growing and exporting products that either can’t legally be sold on our own shores, or can be sold here but only in highly restricted ways.

As legalisation in various nations continues to expand, this could see new markets open up for companies like Elixinol. Being involved early could give the company a significant advantage; however, cannabis producers are also highly exposed to any delays or reversals in the trend of legalisation.

Elixinol’s beaten-down share price and the groundwork the company has laid for future growth both make it an appealing way to get into this booming market. Just remember that it’s a speculative investment, and don’t put any money into the stock that you couldn’t afford to lose.

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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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