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Cannabis CEOs ‘tempered the enthusiasm’ around weed legalization, analyst says

Cowen Managing Director and Senior Research Analyst Vivien Azer joins Yahoo Finance Live to discuss the outlook for the cannabis industry as weed stocks decline.

Video transcript

BRIAN CHEUNG: Well, it has been a bad year across the board for stocks, but one industry that has had a particularly rough go at it, is the cannabis industry. The once high flying stocks getting battered over the last year, despite developments in a number of states toward cannabis legalization.

Let's bring in Vivien Azer, Cowen managing director and senior research analyst, for more on this. Vivian, it's great to have you on the show. Just to kind of baseline here, Aurora Cannabis down 70% year to date, Tilray down 35%, Canopy down 46%. Much steeper than what we've already seen in the broader markets. What's going on with these stocks? Does it really all have to do with the regulatory news headlines out of DC?

VIVIEN AZER: I think it's a-- good to be on. I think it's a combination of underlying fundamentals, as well as a lack of regulatory change. So, importantly, the three companies that you mentioned are all Canadian cannabis companies, so they don't benefit directly from state level regulatory change in the United States. However, the group does tend to trade together, and there has not been any progress in Washington, DC in terms of any kind of legalization whatsoever, which we're not expecting in 2022.

On top of that, we've got some sluggish fundamentals as well. We can see in our proprietary data scrapes that the COVID comps have been quite tough. There was certainly a lot of stimulus in the United States. There was incremental consumption opportunities during the pandemic, certainly in the first year of it. So, in the first quarter of 2022, we are still lapping some stay-at-home comps from last year.

BRIAN CHEUNG: So when you kind of take a look at a lot of the peaks in these stocks, which we saw pre-pandemic, kind of around 2018 or so, you could make the argument at that point, maybe it was just people getting excited about the regulatory headwinds out of DC, perhaps favoring nationwide legalization. I understand the distinction with the Canadian stocks, as you point out. But does that mean that the midterms could be a catalyst for a changing thesis around these stocks if it is, indeed, the case that may be more pro cannabis candidates could end up winning in November?

VIVIEN AZER: Well, the 2018 high was a reflection of the fact that Canada was legalizing for adult use in October of that year. In terms of the midterms, it's really going to come down to the Senate. Our policy expert, Jaret Seiberg, who partners with me on our cannabis research, believes that the House can continue to pass legislation. They have, but control of the Senate is going to be particularly important. And we don't think that there's going to be an elimination of the filibuster. So you have to come up with legislation that not only 50 Democrats will support, but also 10 Republicans.

AKIKO FUJITA: Vivien, when you look at the recent declines in some of these cannabis stocks, the American ones specifically, I mean, to what extent is this about resetting expectations for the likelihood that regulation will not come soon in terms of the federal level?

VIVIEN AZER: I think we're starting to see that from the operators. The messaging out of 1Q '22 earnings season, I think, appropriately tempered some of the enthusiasm that some of the CEOs had been expressing around the potential for regulatory change. At this point, it seems like Safe Banking, which really only provides them access to commercial banking and insurance, is going to be the most likely pathway. So it doesn't provide a meaningful fundamental catalyst. It doesn't eliminate 280E. It certainly doesn't go nearly as far as full legalization. So we're starting to see that, I think, better reflected in the messaging from the companies.

BRIAN CHEUNG: Vivien, I want to ask about just at least the underlying dynamics of demand at play here, irrespective of all that we were just talking about from policy standpoint. You had a nice measure in your recent note about the weighted spot price of flower itself. It's been declining, essentially, over the last, let's call it a year or so. What's behind those trends there? What do you think is that-- does that mean that it's a demand story? Or is there actually perhaps a supply side of that as well?

VIVIEN AZER: There's most definitely a supply story here when you look at the wholesale pricing. So there was a lot of flower that was planted in legal states in 2021. And when that got harvested in October, we went into an oversupply situation. What's interesting is that with that wholesale price deflation, that is translating to lower prices at retail. And that is driving volumes higher.

So consumers are responding to that lower pricing, in particular, against a much more inflationary backdrop for the rest of that consumer's basket. And so, we are continuing to see year over year growth in foot traffic, despite declines in pricing.

AKIKO FUJITA: With that said, Vivien, no question there's still a lot of investors out there who are saying, well, I want to put my money to play here, given the recent dips that we've seen. Which name do you think is the best positioned in the space?

VIVIEN AZER: So we have a strong bias for US operators over the Canadians. It's a much larger addressable market. In 2021, legal sales in the US totaled $25 billion. Our favorite idea amongst the US operators is Green Thumb Industries. They're a multistate operator with exposure to 16 states, including New Jersey, which just legalized for adult use and went commercially live April 21.