Investing in Pot Stocks: Cannabis Industry 2020 Outlook

  • Jan 30, 2020 AEDT
  • Team Kalkine
Investing in Pot Stocks: Cannabis Industry 2020 Outlook

The cannabis industry has been one of the most talked about industries. From a significant boost in 2018 driven by growing approval of cannabis across the world as a medicine and for recreational use, to facing a reality check in 2019, the cannabis industry has witnessed both ups and downs within a short span.

While 2019 may have been a year to forget for cannabis stocks, 2020 might prove to be a turnaround year for the industry.

In the present-day scenario where there is huge uncertainty regarding the impact of coronavirus outbreak, investors will look for stocks that are immune to the threat caused by the virus. The healthcare industry, of whom the cannabis industry is a part, might be one such attractive opportunity for the investors.

A Slow 2019 for ASX-listed Pot Stocks

The cannabis industry had a difficult 2019 with most of the ASX-listed pot stocks generating negative returns of close to or over 20%.

The performance of the cannabis stocks last year highlighted the significant gap between actual financial performance and the unrealistic expectations set for the year.

While there was excitement towards the end of 2018 following the legalisation of the use of cannabis as a medicine in multiple geographies, investors soon realised that the early predictions were quite far from reality. Experts highlighted that the decline in stock prices was mainly a market correction following a significant rise in prices in the previous year.

In the graph below, we can see that some of the major cannabis players such as AusCann Group Holdings Ltd (ASX:AC8), BOD Australia Ltd (ASX:BDA), Cann Group Limited (ASX:CAN), THC Global Group Limited (ASX:THC) and Medlab Clinical Limited (ASX:MDC) generated disappointing returns for the year 2019 with share prices falling by as much as ~68%.

Even though there has been a decline in investor sentiments, the future for the cannabis industry looks promising and attractive, as per several experts.

What can you expect from 2020?

Present scenario with respect to legalisation: Globally, the US has been one of the major players in the industry and is likely to remain so in the future, despite uncertainty as to when cannabis will be legalised in the US at a federal level. At present, 33 states have legalised cannabis for medicinal use, and 12 have legalised its use for recreational purposes.

Canada, another significant player in the industry, has legalised the use of cannabis for both medicinal and recreational use, though a proper framework is still lacking.

Further, 67 countries have decriminalised or legalised the use of cannabis, either as a medicine or for recreational purposes.

Industry experts believe that once the US makes cannabis legal at a federal level, other countries will follow suit, thus opening a huge opportunity for medicinal cannabis players. With a continued focus on making the use of medicinal cannabis legal, it is likely that cannabis is legally accepted in a substantial number of countries going forward.

Clinical Evidence: Several studies have been conducted to study the benefits of cannabis, and it has proved to be effective for multiple indications such as chronic pain, epilepsy, multiple sclerosis, migraine attacks and amyotrophic lateral sclerosis, among others. The clinical evidence strengthens the case of cannabis being approved across the globe for medicinal purpose. Further studies are likely to validate the existing evidence and will aid governments in laying out guidelines and regulations for the use of medicinal cannabis.

Cannabis Industry in Australia: The use of cannabis as a medicine was legalised in the country in 2016, and the government has also approved the export of medicinal cannabis.

At present, there are challenges in gaining access to medicinal cannabis. To prescribe a cannabis product, a doctor first needs to raise an application to the Special Access Scheme of the Therapeutic Goods Administration. However, it is expected that the growing clinical evidence of safety and efficacy of cannabis is likely to ease the process in the country.

Also, the ever-increasing evidence might lead to a listing of cannabis products on pharmaceutical benefit scheme (PBS) which would make the cannabis products affordable for the patients. Industry experts believe that with further development in the legal cannabis industry in Australia, companies in the cannabis space will develop positioning strategies in order to capture a significant chunk of the market.

Potential Market Size:

According to a research firm, the global cannabis market is worth US$ 25 billion. Another firm has adopted an optimistic outlook and valued the market at a mammoth US$146 billion.

At a country level, some market experts believe the US cannabis market will reach ~US$22 billion by 2022 (significantly higher than the 2019 market size ~US$12 billion). Also, according to another research firm, it is believed that the current value of the cannabis market in Australia is in the range $4.6 billion-$6.3 billion, including both legal and illegal usage.

Further,the Australian cannabidiol market is projected to reach ~$8.8 billion by 2030.

Based on the market forecasts, the predictions for the cannabis industry make it almost impossible for an investor to ignore.

Are pot stocks defensive in nature?

Probably not. While pot stocks form a part of the healthcare stocks, which are defensive, there are multiple factors that affect the cannabis industry, unlike the healthcare industry, such as global and regional regulations and guidelines with respect to the legalisation of the use of cannabis. Besides, the industry is in an early stage and thus, faces the same uncertainties as other upcoming industries.

Thus, while the cannabis industry might be immune to the stock market fluctuations, it has its own barriers and challenges that may lead to a performance different from what is expected from a defensive stock – generating stable returns.

Bottomline

Driven by factors including increasing acceptance of cannabis as a legal pathway of treatment of indications, growing evidence of its medicinal benefits, higher number of companies investing in the cultivation of cannabis and a global market that looks promising, cannabis stocks could the ones to look out for in 2020.


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