Why have pot stocks been bad investments in the last 5 years despite ruthless liberalisation

If you look at the performance of most pot stocks in the past 5 years, you’d think the pot industry has gone nowhere. But of course, that is not the case. Countless jurisdictions have legalised cannabis for recreational and medical use. Australia has only legalised it for medical use – only the ACT allows it for recreational use. But with most pot stocks on the ASX focused on the medical space this shouldn’t really matter.

So, why is there such a disconnect between the progress made in the industry and how pot stocks on the ASX have performed?

Pot stocks on the ASX are early-stage

As with many other industries, the cannabis sector on the ASX is host to companies at an early stage of commercialisation or at an R&D stage. There have been many instances of liberalisation measures in foreign countries that have led to one-day spikes in individual pot stocks. But such individual measures are unlikely to benefit them directly.

One measure that was an exemption was the TGA’s late 2020 decision to declassify low-dose CBD products, allowing them to be obtained in pharmacies without a prescription. However, companies still had to undertake clinical trials for such new products, a long and arduous process. And this is even before you consider that companies had to decide what indications to treat, how to structure such a clinical trial and obtain relevant approvals for such a clinical trial.

Pot stocks globally not much better off

But more established pot stocks have done little better. The world’s largest listed pot stock, Curaleaf (CNSX:CURA) which is capped at CA$2.5bn has shed 45% in the last 12 months. One of the key reasons was the supply glut that occured in Canada post-liberalisation in the late 2010s that led to companies having to discount their prices heavily.

Also keep in mind that cannabis remains illegal on the federal level in the United States and is likely to until after the 2024 presidential election at least. This has led to a lack of clarity and constrictive regulations for companies looking to enter into the industry.

Furthermore, many investors have been hesitant to invest due to tax implications and other risks associated with cannabis investments. Additionally, there have been limited options in terms of trading platforms for pot stocks, which has also contributed to their underperformance.

The pot sector (and pot stocks) have a long way to go

The industry still has a long way to go before it can be considered a legitimate option for investors. Cannabis businesses (listed pot stocks and unlisted companies alike) are still limited in terms of banking services, access to capital and other resources outside of investment opportunities, making it difficult for them to succeed. Moreover, potential investors need additional assurance regarding future regulations since those could potentially change at any moment due to shifting political winds.

And even people obtaining legitimate, legal medicinal cannabis treatments have their own struggles, such as not being caught out by anti-drug driving laws. Until these issues are addressed, pot stocks will likely remain underperforming compared to other sectors in the stock market.

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