Marijuana companies – or “pot stocks” to those who prefer brevity – were all the rage back in late 2017 and early 2018.
California, America’s most populous state and the fifth largest economy in the world, was legalising the recreational use of cannabis, and Canada had announced it would be doing the same. A new, potential multi-billion-dollar global industry in recreational cannabis was basically being invented overnight.
But jump forward a couple of years and the winds have gone out of the sales of most pot stocks. Take AusCann Group Holdings Ltd (ASX:AC8) as an example. In January 2018, it seemed like AusCann could grow into the leading medical marijuana company in Australia, and excitement around its prospects had pushed its share price up towards $2. But since then its share price has trended steadily downwards. Its shares are now valued at just $0.215 and its total market cap has dipped under $70 million.
The share price charts of other once promising companies, like Cann Group Ltd (ASX:CAN) and THC Global Group Ltd (ASX:THC) tell a similar story. Despite all the hype around legalisation, it seemed like market saturation meant that only those few major players at the very top could actually turn a profit. In the US state of Oregon, one of the first states in the country to legalise the recreational use of marijuana, new sellers flooded the market, driving pot prices down.
However, something curious has been happening over the last month. The share price of Cann Group has doubled in just a few weeks, while that of fellow small-cap Creso Pharma Limited (ASX:CPH) is up an astounding 650% since early November.
What is driving the gains?
A couple of key global events have been behind the surge in ASX pot stock valuations. Firstly, in early December, following recommendations from the World Health Organisation, the UN removed medical marijuana from its list of Schedule IV narcotics. Schedule IV contains harmful and highly addictive drugs like heroin and other opioids.
Many governments look towards these UN schedules for guidance on how to classify drugs, and so this downgrade could potentially lead to further global acceptance of medical marijuana.
The second key event was the passing of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act by the US House of Representatives. While many US states have legalised cannabis, it still remains illegal under federal law. The MORE Act aims to decriminalise weed at the federal level and erase non-violent federal marijuana convictions.AC8
The MORE Act is unlikely to pass a Republican-controlled Senate, but it is still a demonstration of continually changing attitudes towards marijuana in America. And it has ramifications on a global scale, with many investors now renewing their interest in local Australian cannabis companies.
However, the same problems of market saturation and high competition still remain, meaning picking winners in this race is still an incredibly risky enterprise.
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Motley Fool contributor Rhys Brock owns shares of Creso Pharma Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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