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What’s next for these 4 beaten-down ASX cannabis stocks?

Usually, when lawmakers take a step further on the road to legalisation, there’s a flurry of speculation around cannabis stocks. However, despite positive news for marijuana enthusiasts from the Australian Capital Territory Legislative Assembly yesterday, Australian cannabis stocks fell.

Althea Group Holdings Ltd (ASX: AGH) was down 4.55%, Elixinol Global Ltd (ASX: EXL) fell 4.17%, Auscann Group Holdings Ltd (ASX: AC8) dropped 2.78% and Cann GroupLtd (ASX: CAN) lost 0.31%.

Why are these ASX-listed cannabis shares falling in price at the same time Australian lawmakers are flirting with legalisation? And does it represent a good buying opportunity for speculative investors, or should we be cautious?

Big opportunity but with big risks attached

Legal cannabis producers seem to have a wonderful opportunity ahead of them. We know, thanks to the persistence of the black market, that there are plenty of customers out there. Customers who would presumably much rather buy from legitimate businesses. However, that hasn’t made cannabis investing a safe bet — far from it.

Progress towards legalisation may seem guaranteed, just because of the momentum that we’ve seen in places like Canada and the United States, but it’s far from it. Many of the valuations of cannabis stocks are based on assumptions about easing restrictions and increasing access to markets that are speculated to exist, in places where cannabis is currently illegal. Many areas exist in a grey area of partial legality, which may or may not improve.

If you’re dropping money into cannabis growers or distributors in the hopes that markets like these will soon open up to them, it’s important to acknowledge that you aren’t really investing, you’re speculating.

There’s a place for that, and the gains you could make are potentially huge if it pays off. But you shouldn’t ever do so with money that you can’t afford to lose if it doesn’t work out.

For example, Elixinol Global reported a 19% growth in revenue in first half 2019 but saw a slight drop in profits as it invested heavily in developing new products, marketing, driving brand awareness and on market research. Elixinol is projecting massive growth in the hemp and CBD market in the US, with the CBD market size estimated to double from US$3 billion to US$6 billion, according to the company’s FY2019 results presentation. If Elixinol is right, this spending could pay off massively for shareholders, especially anyone buying at yesterday’s closing price of $1.96, down a long way from the share price peak of $5.31. However, you aren’t just speculating that the company’s heavy marketing spend will have been effective, but also that the estimated progress of legalisation and market growth in the US will continue.

Medical cannabis product manufacturer Althea hit major milestones this year in terms of patients receiving its products. However, it too has seen share price slides, with it closing yesterday at 74 cents, well down from highs of $1.23 back in mid-July.

Auscann Group and Cann Group have similarly fallen. The Auscann share price was at 35 cents when markets closed yesterday, a fraction of the speculative high of $1.74 it soared to in January last year. Cann group, meanwhile, saw the least of the share price falls in yesterday’s trade of these four, but it too is well below its all-time highs. At $1.62 yesterday, it’s significantly lower than the $4.01 it reached in January 2018.

ACT legalisation only a baby step

Why these falls, when yesterday’s news seems at first glance to be a ray of hope? Well, the fact is that the legislation passed yesterday isn’t the massive coup for marijuana fans that some headlines made it seem.

The new law allows for small amounts of personal possession, with adults able to carry up to 50 grams of dry cannabis and grow up to two plants per person. However, there is no provision in the law for buying or selling of cannabis, plants or of seeds. The law does nothing to address refined products such as CBD oils or edibles. These refined products and cannabis derivatives are the main stock in trade for medical cannabis companies like Althea Group Holdings, Elixinol Global, Auscann Group Holdings and Cann Group when they export to legal markets such as Canada and much of the US.

Finally, the new ACT laws may provide hope for the future, but they remain in conflict with Australian federal law. That leaves users in a very worrying grey area.

While legislation like this could be a small step on the path, there’s still a long way to go before Australian companies like Auscann, Elixinol, Althea or Cann Group can sell the same products here that they’re already shipping overseas.

Much of the early hype seems to have come out of marijuana share prices on the ASX, with these four all well down from their previous highs. You can view that as a speculative long-term opportunity, and with some of these companies, you’ll likely be right, eventually. Just remember that this is a volatile industry, with plenty of ups and downs ahead, and don’t expect an immediate turnaround.

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Motley Fool contributor Tyler Jefferson does not own shares in any company 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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