Cannabis Stocks are Down: When Will They Recover?

This year, investors have watched their capital go up in smoke, as cannabis stocks have performed poorly with falls of up to 50 per cent or more. Looking at 21 of the largest cannabis stocks, only three have made a gain in 2022 including Cronos up 70 per cent, Botanix Pharmaceuticals up 41 per cent and Hygrovest up 22 per cent. The other 18 stocks have all fallen between 7 and 72 per cent with the average loss around 45 per cent.

Why are cannabis stocks falling so heavily?

When analysing the stocks, it is easy to see why this industry is struggling. Of the 21 stocks analysed two represent 83 per cent of the total market capitalisation, which include Zelira Therapies and Cann Global and currently these stocks are down 72 per cent and 63 per cent respectively in 2022. The total value of shares traded in Zerlira during July was around $1.6 million while in Cann Global it was under $150 thousand. So, if you are looking for liquid stocks to buy, this is definitely not the place to be.

Right now, the cannabis industry in Australia is very immature, which makes these investments highly speculative. Given this, investors need to be very selective with what they choose to buy in this sector.

On 30 July, research company BMC released the Cannabis Medicine Survey 2020 (CAMS-20) and its findings on medical use of cannabis were interesting. The median age of those using cannabis for medical purposes was 46, however, only 13.3 per cent were consuming prescribed cannabis products while 62 per cent were using illicit products. Of those using prescribed cannabis, around 50 per cent of the use was for pain management while around 30 per cent was for mental health. No doubt, this industry will expand and thrive given that 95 per cent of participants in the survey reported improvements in their respective health condition.

So, what is delaying this industry from reaching its tipping point? According to the survey, nearly half reported the prescribed products were too expensive while others stated that it was difficult finding doctors that prescribed cannabis. In addition, 25 per cent of doctors have been unwilling to prescribe this product.

However, as the industry matures, these issues will become a thing of the past as all new industries experience challenges in their early days. I suspect we will see a consolidation in this industry over the next few years and we will reach a point where we have a few major players that will eventually become great investments.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 6.29 per cent followed by Materials up 1.89 per cent and Information Technology up 0.78 per cent. The worst performing sectors included Consumer Staples down 6.14 per cent followed by Communication Services down 2.11 per cent and Consumer Discretionary down 1.65 per cent.

The best performers in the S&P/ASX top 100 stocks included Altium up 18.51 per cent after releasing a good report last week followed by Pilbara Mineral up 16.39 per cent and Allkem up 12.72 per cent. The worst performing stocks included Endeavour Group down 12.98 per cent followed by Reliance Worldwide down 9.53 per cent and Coles Group down 8.83 per cent.

What's next for the Australian stock market?

After rising for eight straight weeks, the All Ordinaries Index has finally started to pullback as it confirmed its first down week. Early last week, the market was down over 2 per cent before rising to close the week down just 0.18 per cent. Despite the market rising strongly towards the end of last week, my preference is for it to fall for at least another one or two weeks before rising again.

The reason I say this is because momentum has been very strong over the past two months, and I believe the market needs to return to more normal levels for the next rise to be sustainable. As we know, anything that rises fast often falls faster and it is typically retail investors that get caught out as they suffer FOMO near the end of a strong rise only to be subjected to the subsequent fall.

While I am expecting the market to fall in the short term, I believe it will be overall bullish for the remainder of this year and may even challenge the all-time high of 7,956 points set back in January. Right now, I think investors should be getting excited as I am seeing many top stocks setting themselves up for some nice moves.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.