Investors cool on cannabis as scandals smoke out fearful traders

Australia’s cannabis stocks are struggling to recover after the market correction in early February.

Almost all of the 21 ASX-listed pot stocks monitored by Stockhead are still down from their January highs.

Only Atlas Pearls (ASX:ATP), which has a cannabis joint venture in Tasmania, Zelda Therapeutics (ASX:ZLD) and CannPal (ASX:CP1) are trading above their February 1 share prices.

It’s the same story in Canada’s Marijuana Index of 24 cannabis-related stocks, which is down around 30 per cent since the start of the year.

The dip has been partly caused by news of a delay in the legislation of recreational cannabis use in Canada, which has been driving Canadian — and Australian — pot stock values.

In the local market, John Athanasiou, founder and CEO of Red Leaf Securities, says reputational damage caused by recent scandals at tech companies Get Swift (ASX:GSW), Buddy (ASX:BUD) and Big Un (ASX:BIG) is also having an impact in other small cap sectors such as cannabis.

“There’s concern in the small caps space given what’s happened in other small cap IT companies, it might be prevalent in other sectors as well — like cannabis,” he told Stockhead.

“There are also a few cannabis stocks with internal boardroom issues, which isn’t helping.”

The Hydroponics Company (ASX:THC) and eSense Lab (ASX:ESE) are both dealing with such issues, while others like Stemcell United (ASX:SCU) have struggled to sell capital raisings to a skeptical market.

However, growing demand for cannabis — especially in North America — is expected to underpin growth among cannabis plays later this year. The legalisation of recreational pot in Canada — now expected to go ahead after August — and a similar rollout in US States will drive demand.

“The potential move in Canada to legalise recreational use in 2018 should provide strong catalysts in the sector as a whole, leading into year’s end,” says Niv Dagan, Executive Director at PEAK Asset Management.

Investors should focus on “cannabis stocks that are undervalued relative to peers”, he says.