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Cannabis legalization 'odds are better' following President Biden's possession pardons: Analyst

Stifel Cannabis Analyst Andrew Carter joins Yahoo Finance Live to discuss the implications of President Biden's marijuana possession pardons and what it means for cannabis stocks and the future of legalization.

Video transcript

DAVE BRIGGS: The pot stock high wore off quick following President Biden's announcement of historic federal pardons for marijuana possession. While most multistate operators climbed between 20% and 30% Thursday, most are flat or down slightly today.

So what's the level of optimism in the industry? Andrew Carter is the Stifel cannabis analyst and joins us now. It was a massive announcement and shocked the world, including the stocks, but then it seemed everything came back down to Earth. What's your level of optimism, and what changed as of that announcement?

ANDREW CARTER: Yeah, well, first off, thanks for having me.

DAVE BRIGGS: Good to have you.

ANDREW CARTER: I would say, number one, it was surprising, to your point. The first point is, though, the pardons, it doesn't really accomplish much. There's very few simple marijuana charges at the federal level for just possession, though most of those are done in the states. They don't have to be done there.

The third thing was kind of interesting that we could-- that he is kind of signaling that he wants to start the process of reviewing marijuana status. That can change through the executive branch. It's more bureaucratic if he goes through the FDA.

But you asked what changed. Well, yesterday nothing really changed about the category. It's a difficult category right now. I think you could see the negative of yesterday, but it didn't sustain into today, is that you do have a problem, both the US and Canada, of too many players in the category. And if you open up capital, that could only make things worse.

So it's hard to say where things changed because at best, if we do go down this process of descheduling, you're going to get-- it's going to be a long process. And as we wrote, not sure you're going to like what's at the end. The one silver lining is maybe SAFE Act does have a better chance of happening in the lame duck session out of this.

DAVE BRIGGS: Yeah, I found it notable that Kim Rivers, Trulieve CEO, joined us, said it was better late than never as for the pardons, but called it historic and monumental as for the potential rescheduling. In terms of the investment space, though, did anything change if you are a cannabis investor?

ANDREW CARTER: No, the category is still in a tough place. Let's go around the world. But the hydroponic stocks that we cover, which is actually kind of one of the broader classes [INAUDIBLE] include Scotts Miracle-Gro. The category is still amidst a really great recession where we have too much capacity. W Technology kind of a leading cannabis tech vehicle. I think that we think that they have a strong value proposition over time. They have one of the very few brands in cannabis.

But retailers are still under pressure in their markets. Canada-- this has really nothing to do with Canada, but Canada is a difficult market. It's increasingly fragmented, very competitive, and a difficult structure. And for as far as Canadians being able to invest here, well, I don't know why I'm excited about Canadians suddenly being able to invest in the US if assets were to re-rate, which if they would do.

MSOs-- I mean, I'll defer to my colleague Andrew Parker on that one, but the US MSOs, it doesn't change anything overnight for them. But there is that silver lining of opening up capital via SAFE, and if that does pass.

DAVE BRIGGS: Yeah, which still no real optimism because not a single Republican in the Senate has publicly supported SAFE. What's your level of optimism-- I mean a timeline on actual federal legalization? And beyond that, what could change the investor story?

ANDREW CARTER: Yeah, sure, I'd say for the SAFE Act, I mean, I think the odds are better now we know that, and I think in particular because President Biden did do the pardons. So that potentially provides some progressives cover, and what we'll get into, the nuances of pardons versus expungements and see if some of the progressives take refuge in that.

So a little bit better, but my timeline on it, I guess, I'd be-- we could-- I think because President Biden has signaled this, maybe even it could lead to Congress wanting to take up the issue themselves as to not lead this and not leave it to intention consequences. Maybe something does happen within the next two years. But I think that is an optimistic case in itself.

DAVE BRIGGS: Yeah, I think more a political win than anything else, as we approach the midterms, and gas actually goes back up. He needed some sort of October surprise for a win. Perhaps, though, Tilray's reporting gives us a better sense overall of this sector's $66 million loss. What did we learn there?

ANDREW CARTER: Well, yeah, the $66 million loss you refer to is an accounting loss. We refer to the adjusted EBITDA. The numbers were kind of right in line with our estimates, $13.5 million EBITDA. A lot of one-time things in the quarter, though, was the $42 million burn. I don't think we learned a lot. We know Canada is a difficult market that's weighing on their profits, even as they reduce their costs and try to increase their market share. It's one thing we learned.

They did reiterate their EBITDA guidance for the year, I would argue with FX. They actually-- the guidance is actually higher and a little bit difficult. That was encouraging. They also reiterated their free cash flow guidance. Wouldn't say we learned anything today.

Canada is a difficult market. They-- and Tilray's probably, as we've written, we believe that of the companies trying to go after being a leading market share position in Canada and trying to leverage that for kind of a global stake, they're probably in the best position, but you can't get away from the fact that Canada is a very difficult market. And that's going to be expensive to do.

DAVE BRIGGS: Yeah, at this point, more cautionary tales than success stories in cannabis. Stifel analyst Andrew Carter, good to see you. Thanks.