ASX cannabis shares put in a mixed performance in the 2021 financial year (FY21).
Of the 9 stocks broadly falling into the ‘ASX cannabis share’ category, 6 saw their share prices fall while 3 gained in FY21.
Creso Pharma Ltd (ASX: CPH) was the top performer in FY21, gaining 352%.
Cann Group Ltd (ASX: CAN) came in near the bottom of the list, with shares falling 57%.
Unlike stocks producing other commodities – from gold to almonds – the price of marijuana doesn’t impact companies involved in medicinal and recreational cannabis production nearly as directly.
There are numerous factors that determine any listed company’s share price. These include quality of management, debt levels, market growth outlook, and barriers to entry for any would-be competitors, to name a few.
But you just need to look at how ASX gold shares perform during a time of rising gold prices relative to a time of falling gold prices (as we’ve experienced recently) to see the price of gold has a strong impact on their share prices.
The march to legalisation
Cannabis, however, is a rather unique commodity, in that it remains illegal across much of the world.
With that in mind, ASX cannabis shares, and indeed pot stocks across the world, tend to do well when the global legal market expands as the stigma of illegality is gradually stripped away.
As you’re likely aware, the illicit nature of cannabis has been inexorably changing, led by Uruguay.
In 2013 the tiny South American nation became the first on Earth to fully legalise cannabis. Since then, Canada and many states in the US have followed suit, with Mexico debating similar legislation.
A potential $63 billion market by 2025
Online investment platform eToro’s market analyst Josh Gilbert points to a forecast by JPMorgan that estimates legal cannabis sales could hit US$45 billion (AU$63 billion) by 2025.
Gilbert told the Motley Fool this “will see most cannabis stocks scrabbling for market share. As cannabis sales increase, the sector is becoming more and more saturated”.
While legal recreational use is a growing segment, the medicinal properties of cannabis are helping drive wider global acceptance.
“The plant’s contribution to pain relief, cancer treatment and other medical issues has been well researched and documented, and a booming industry has started to grow around it,” Gilbert said.
With New York slated to green-light recreational marijuana use in 2022, the global cannabis market is growing like a weed.
A US listed pot stock to consider
Gilbert points to Canopy Growth Corp (NASDAQ: CGC) as an international share that could do well in an expanding legal cannabis market:
The largest cannabis stock by market cap, Canopy Growth, has arguably positioned itself to benefit from the flourishing legalisation of cannabis, by focusing on target countries such as Canada, the US and Germany.
With Canada having fully legalised recreational marijuana alongside its medicinal uses, companies have been turning to infusing food and drinks with THC, the active ingredient that gets users “high”. Gilbert said that edibles and beverages accounted for 47% of Canopy Growth’s sales in FY21.
Canopy Growth is in the prime position to benefit from all use of cannabis products, whether that is medicinal or recreational. Its financial position provides an advantage against its peers, thanks to its partnership with Constellation Brands in the US. Constellation Brands owns around 38.6% of Canopy Growth, which has helped grow its beverage business and further enhance its potential for profitability.
Revenues are also continuing to grow, with its FYQ1 earnings in August 2021 demonstrating a 23% increase year-over-year. Despite this, the company’s revenues came in short against analyst expectations.
Up 1.2% over the past 12 months, Canopy’s share price is down 37% year-to-date. Gilbert says this is an important reminder “that investing in cannabis stocks doesn’t come without its risks”.
He added: “The industry has also experienced a long run of underperformance, but further legalisation of cannabis globally should be the catalyst for share price growth.”
How have these 2 ASX cannabis shares been tracking in FY22?
Now let’s get back to the 2 ASX cannabis shares mentioned above.
We know how they performed in FY21, the financial year ending 30 June. So how have they done since the start of FY22?
Creso Pharma, the top performer last financial year, is down by 11% since the opening bell on 1 July.
Cann Group, one of the worst-performing ASX cannabis shares in FY21, is continuing to struggle in the new financial year, with shares down by 24% since 1 July.
These ASX cannabis shares, among others, will certainly be eyeing the potential market growth as more US states, and potentially more nations, move to legalise medicinal and recreational marijuana.