What are ASX cannabis shares?
Cannabis stocks are shares in companies that cultivate, distribute, and sell cannabis and cannabis products. Most cannabis shares on the ASX are focused on medical cannabis and include pharmaceutical and healthcare companies like Vitura Health Ltd (ASX: VIT) and Incannex Healthcare Ltd (ASX: IHL).
It has been legal to grow cannabis for medical and scientific purposes in Australia since 2016. In late 2022, the Greens announced a plan to legalise marijuana nationally, which could unlock significant revenue potential for cannabis shares.
Recreational use and possession of marijuana remain illegal at the federal level, with the ACT being the only state or territory allowing adults to possess cannabis for personal use. Because of this, the size of the legal cannabis market in Australia is still relatively small, with the market expected to reach US$385 million in revenue in 2023.1
However, it is expected to grow rapidly, with some analysts forecasting a compound annual growth rate (CAGR) of more than 30%.2 Favourable changes in legislation enacted over the next decade could see that growth rate go even higher.
Why invest in them?
Investing in ASX cannabis shares exposes investors to the high growth Australian legal cannabis sector. The sector is experiencing high growth because it is still in its early stages. This means ASX cannabis stocks are still primarily speculative investments. They will appeal to investors with a higher risk tolerance who want to hold more of their investments in high-growth shares.
If the idea of big swings (many of them to the downside) in the value of your investments makes you feel anxious and queasy, then cannabis shares may not be right for you. They are known to be volatile, with many ASX cannabis stocks losing significant value in 2022. The Vitura Health share price declined by about 50% between the end of 2021 and the start of 2023. Likewise, Incannex Healthcare shares fell by about 75% between early 2022 and early 2023.
Because the legal cannabis market is still in its infancy, predicting how prices will behave is difficult. For example, legalising recreational marijuana use in Canada should have been a boon for the cannabis industry in North America. However, an overabundance of supply caused cannabis prices to fall, meaning local companies expanded more slowly than anticipated.
For those investors who believe in the long-term outlook for the global cannabis industry, it is easy to look beyond these short-term market fluctuations. But for investors seeking more certainty in the near-term value of their portfolio, blue-chips might be a better fit than pot stocks.
Top cannabis stocks on the ASX
|Vitura Health Ltd |
|Vitura operates a purpose-led portfolio of companies that work to bridge|
the gap in the medical cannabis market between doctors, suppliers, pharmacists,
|Incannex Healthcare Ltd |
|Clinical-stage pharmaceutical development company undertaking programs |
for cannabinoid pharmaceutical products and psychedelic medicine therapies
|Cann Group Ltd |
|Medical marijuana company focused on breeding, cultivating, manufacturing, |
and supplying medicinal cannabis for sale within Australia and for approved
Formerly Cronos Australia Limited (ASX: CAU), the company changed its name to Vitura Health Ltd in February 2023. The new name is meant to more closely reflect the aspirations of the company following its merger with CDA Health Pty Ltd (CDA) in late 2021. CDA, now a wholly owned subsidiary of Vitura, operates two businesses:
- Burleigh Heads Cannabis – the operator of a leading prescriber, patient, pharmacy, and supplier online platform, CanView, which sells and distributes 200 product stock keeping units (SKUs) within Australia from 30 international and domestic medicinal cannabis producers
- CDA Clinics – undertakes nationwide telehealth consultations with patients seeking access to medicinal cannabis.
Vitura also owns a 75.5% stake in Cannadoc Health Pty Ltd, a medicinal cannabis clinic that undertakes nationwide telehealth consultations.
Incannex is a clinical-stage pharmaceutical development company undertaking many US Food and Drug Administration programs for cannabinoid pharmaceutical products and psychedelic medicine therapies.
The company is investigating the use of psilocybin-assisted psychotherapy for anxiety, developing a cannabidiol treatment for concussion and traumatic brain injury, and looking to manufacture medicated chewables designed to treat nicotine and opioid disorders, among other projects.
Each of these treatments has a large addressable market, making Incannex an exciting company to watch. However, projects are still in the clinical trial phase. While there have been some positive results, it could be years before any of the company's products can be brought to market.
Cann Group focuses on breeding, cultivating, manufacturing, and supplying medicinal cannabis for sale and use within Australia and for approved export markets. It has research, cultivation, and manufacturing facilities in Melbourne and near Mildura.
The company's objective is to supply high-quality, safe medicinal cannabis for a range of diseases and medical conditions.
Cann Group has been investing in its plant breeding program, using the latest in agricultural science to develop new, high-yielding and resilient genetic lines. It has also invested in the construction of its leading facility near Mildura, which is capable of delivering high-quality, high-volume, and low-cost products. These investments are expected to pay dividends in future financial years.
What might the future hold for ASX cannabis shares?
The number of active medical cannabis patients in Australia has increased from just a handful in 2018 to more than 100,000 in 2022.3
The number of doctors with authorised prescriber status for medicinal cannabis has also grown rapidly, from 430 in September 2021 to more than 1400 by September 2022.4 Industry revenue is increasing commensurately with the lift in demand.
Many companies have found it difficult to maintain supply continuity, especially with much of the industry still relying on overseas imports. Delays and rising international shipping costs mean more companies seek local cultivators and manufacturers. Domestic cultivation is expected to be on the rise in 2023, which will remove some of the costs associated with importation.
A recent report from the Penington Institute in Melbourne indicated that Australian taxpayers would save approximately $850 million per year if cannabis were decriminalised.5
More than one-third of Australians aged over 14 years have used cannabis at least once, and 77.9% believe cannabis possession should not be grounds for a criminal charge.6
With these attitudes coming to the fore, it may not be long before there is a legislative shake-up of cannabis laws.
Pros of investing in ASX cannabis stocks
Huge growth potential: The global cannabis market is still in its early stages, meaning the growth opportunities are truly enormous. If Australia moves ahead with legalisation, the market could grow at a fast clip.
Adoption in medical settings: As cannabis becomes more ubiquitous and laws are relaxed, biotechnology companies may find more uses for medical marijuana. This could rapidly expand the medicinal cannabis market, even if the recreational market hits some legal roadblocks.
And the cons?
High risk: With a high potential reward, there usually comes a lot of risk. Because the legal cannabis market is still so young, analysts are yet to fully understand how it will behave. Current estimates of growth rates are just that – estimates – and there is no guarantee the market will grow as fast as predicted.
Not all companies will make it: If we take Canada as an example, oversupply led to price falls, eventually squeezing smaller companies' profits. Not all companies will survive. It might be wise to spread your investment across a few different cannabis shares to mitigate some of this risk rather than putting all your eggs in one basket.
Risks from regulation and legislation: So much of the growth runway for the global cannabis industry depends on favourable treatment from governments and regulators. There is always the risk that governments may crack down on cannabis use or reverse previous law changes.
Are ASX cannabis shares a good investment?
ASX marijuana stocks are still somewhat risky, speculative investments. Therefore, you should carefully consider your financial situation and risk tolerance before investing in them. Pot stocks may not fit within your investment strategy if you have a low-risk tolerance, are nearing retirement, or are only planning to invest over a short timeframe.
However, if you are bullish on the long-term outlook for the cannabis industry and you can afford to ride out some volatility in the short term, then cannabis shares may appeal to you. It's still early days in Australia's cannabis industry, but as the world changes its view on the drug, it's clear that Australia's perspectives are also adjusting.
Given the risk involved, it's still probably wise to allocate only a small portion of your portfolio towards pot stocks. And, if you can, spread your investment out over multiple cannabis shares to mitigate the risk that one of them might go belly-up.
- With additional reporting by Motley Fool contributor Katherine O'Brien