In the past month, three cannabis stocks that provide both medication and wellness solutions, have debuted at the UK stock market. I think this in itself can be a good indication that the legal cannabis industry is growing. Investor interest in the initial public offerings (IPOs) confirmed this further.
Cannabis industry growth potential
According to cannabis intelligence provider, Prohibition Partners, the UK’s legal cannabis market will grow from US$190,000 in 2019 to as much as US$3bn by 2024, following its legalisation in late-2018.
Going by this alone, it looks like a good idea to at least get to know these stocks.
Cellular Goods: wellness focus
Founded in 2018, Cellular Goods, the most recent one to IPO, has quickly acquired a market capitalisation of £53m.
The company focuses purely on the wellness market, developing products like a skin mask and serum as well as a roll-on athletic recovery gel. These are manufactured using synthetic cannabidiol or CBD, a chemical compound found in the cannabis plant.
I think its future is unknown though. It is pre-revenue at present, and investor interest is already waning in the stock. Its share price has more than halved from its listing highs.
Kanabo Group: wellness and medical marijuana
Kanabo Group is also pre-revenue, though its story is somewhat different. The Israel-based company has been around for five years, developing both wellness and medical treatments. Its one unique product is a metered vaporiser to ensure accurate dosage of cannabis treatments.
It has run pilots of its products in key markets like the UK and Germany, with some evidence of success as seen in its growing revenues from 2017–19. It did run into the Covid-19 stumbling block in 2020 though.
Kanabo hopes to expand into the EU now.
MGC Pharmaceuticals: pure-play medicine
MGC Pharmaceuticals was the first of the three to get listed. Unlike the other two, however, it is an AIM stock. It focuses purely on cannabis-based medical treatments, especially for epilepsy.
It has made some business headway, evident in the fact that it reported sales of $456,000 during the December 2020 quarter. This is a 67% increase over the quarter before.
It functions in geographies like the UK, Australia, and Brazil, but is loss-making at present.
Big risks ahead for cannabis stocks
A loss-making company to me is typically a red flag, with the exception of high-growth markets.
That said, there are big risks to consider here. Cannabis is still a nascent market, and future research could show that its harmful effects outweigh the positive ones. This has been the case with vapes. This puts the industry’s future in jeopardy.
Also, societal attitudes towards cannabis are still evolving. So these products may not see the kind of reception that is forecast. In other words, the market can fail to develop, which will impact the sector’s and these companies’ growth.
The takeaway for cannabis stocks
I am a believer in the potential value of this industry. But at this stage it is risky. I am watching these stocks, though.
