Cannabis stocks may not give you the high you're after

This year, investors have watched their capital go up in smoke with cannabis stocks given that some have fallen more than 50%.

Looking at 21 of the largest cannabis stocks, only three have made a gain in 2022 including Cronos up 70%, Botanix Pharmaceuticals up 41% and Hygrovest up 22%. The other 18 stocks have all fallen between 7% and 72% with the average loss around 45%.

When analysing the stocks, it is easy to see why this industry is struggling. Of the 21 stocks we looked at, two represent 83% of the total market capitalisation, which include Zelira Therapies and Cann Global and currently these stocks are down 72% and 63% 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 $150,000. 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 July 30, 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% were consuming prescribed cannabis products while 62% were using illicit products.

Of those using prescribed cannabis, around 50% of the use was for pain management while around 30% was for mental health. No doubt, this industry will expand and thrive given that 95% of participants in the survey reported improvements in their respective health conditions.

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 reported that it was difficult finding doctors that prescribed cannabis-based products. In addition, 25% 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.

The best and worst performing sectors this week

The best performing sectors include Energy up more than 4% followed by Materials and Information Technology, which are both just in the green for the week.

The worst performing sectors include Consumer Staples down more than 7% followed by Consumer Discretionary and Financials, which are both down more than 2%.

The best performers in the S&P/ASX top 100 stocks include Altium up more than 20% after releasing a good report this week followed by Pilbara Mineral and Allkem, as they are both up more than 11%, while Wisetech Global is up more than 8%.

The worst performing stocks include Endeavour Group down more than 12% followed by Reliance Worldwide down more than 9% and Coles Group down more than 8%.

What's next for the Australian stock market

After rising for eight straight weeks, the All Ordinaries Index has finally started to pullback given that in the first two days of this week the market was down more than 2%. On Wednesday and Thursday, the bulls charged back, erasing around half of the fall of the prior two days, so it will be interesting to see where the market closes today.

My preference is for the market to fall for at least one or two more weeks before rising given that momentum has been very strong over the past two months and it needs to return to more normal levels for the next rise to be more 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.

I believe overall the market will be bullish for the remainder of this year and may even challenge the all-time high of 7956 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.

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