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We think the STATES Act is more reasonable because it would not be a full legalization or marijuana: Analyst

Vivien Azer, Cowen and Company Managing Director and Senior Research Analyst joins the Yahoo Finance panel to discuss the Cannabis stock outlook as Democrats take control of the Senate.

Video Transcript


ZACK GUZMAN: Welcome back to Yahoo Finance Live. I want to spotlight the action we've seen play out in the cannabis space, following the Democratic wins in those Georgia key runoffs there. That was going to give control in the Senate to Democrats. Of course, we already saw some serious reform come through in the MORE Act that would decriminalize marijuana at a federal level pass through the House. Now the Democrats will control both chambers in the upcoming Biden administration. A lot of investors out there even more bullish on the cannabis sector.

But here to break down why we should temper maybe perhaps some expectations there is our next guest. Vivien Azer is Cowen and Company managing director and senior research analyst and one of the top analysts in the cannabis space. And Vivien, appreciate you coming back on the show. I mean, we're walking through some of these scenarios that we could see with Democratic control.

It sounds like you're not very hopeful that we'll see the full MORE Act pass, but potentially some form of the States Act, which would let, you know-- which would alleviate some of the concerns we've seen in the sector, from tax implications to some other things in terms of accessing the banking sector as well. So how big of a boost are you forecasting here as we move through 2021, and what do you see happening?

VIVIEN AZER: Hi, sure. Thanks for having me on. So that's right. While the last Congress House of Representatives did vote on the MORE Act and it did pass by party lines, we do think that that was strictly symbolic. You know, given the narrow majority in the Senate in this newly minted Congress, we do think that the States Act is more reasonable because it would not be a full legalization. We think full legalization would be a little bit too progressive for some moderate Democrats in the Senate.

The way that the States Act gets done in part will be a function of whether the Democrats eliminate the filibuster or not. But regardless, we think some version of a modified States Act will go through. As you've rightly pointed out, it will eliminate a very onerous piece of the tax code. And so, it will normalize tax rates, improve pretty meaningfully the free cash flow profiles of these companies.

We think also it will allow the US plant touching operators, the MSOs, to relist into the US. And that, we have laid out, could be very meaningful. In terms of the valuations for these companies, we think that the multiples are in part limited for the US MSOs because of their current trading venue and liquidity constraints.

ZACK GUZMAN: Yeah, and on that front, I mean, we've already seen kind of the ETF here, MSOS, which focuses in on the US operators outpacing-- or actually, the Canadian ETF here, MJ ETF, alternative harvest outpacing the MSOS. But when you think about the upside here, if you do see the States Act, the one you're talking about there, obviously, that would benefit the US operators. That would not necessarily help the likes of Canopy or some of these Canadian operators access the US market.

So when you talk about the upside on the multi-state operators here already in the US, what kind of a percentage gain would you forecast in then, considering, you know, these tax burdens are quite high?

VIVIEN AZER: Yeah, absolutely. We're still working through the models because we don't have visibility around the timing of the STATES Act, so we would anticipate either the back half of '21 or the first half of '22. But what we have asserted is we think there could be as much as 50% upside to the revenue multiples for the US operators strictly by virtue of relisting to US exchanges.


AKIKO FUJITA: So, Vivien, having said that, who do you think is best positioned right now? What are your top picks in the space?

VIVIEN AZER: Our best idea is Green Thumb Industries. They're an Illinois-based multi-state operator. We're also quite constructive on Curaleaf, which is the largest MSO in the country, as well as another Illinois-based MSO, Cresco.

ZACK GUZMAN: That's interesting. I mean, if you think about 50% upside, you know, obviously, being able to list would impact all of these companies the same. So I mean, how do you see kind of the changes impacting each on an individual basis? In terms of the most important changes, why would it be more beneficial for a Green Thumb or a Curaleaf?

VIVIEN AZER: Well, the-- most near-term catalysts are going to come from what we saw during the general election and the knock-on effects there. So, as a reminder, there were five states that had ballot initiatives in place. 100% of them passed, which was better than we'd expected. But the most important one was New Jersey.

And just yesterday, we saw that Governor Cuomo has reintroduced a proposal to introduce adult use legalization in New York. So that's going into his proposed budget that needs to get signed off on by April. That's a $3 billion opportunity. The medical marketplace in New York is very, very small. So when we evaluate MSOs, for the next two years anyway, we think that the real analysis has to come down to state by state exposure.

ZACK GUZMAN: Yeah, and on that front, I mean, when we think about state by state, it's obviously been a big boost. But it seems like things might be operating a bit slowly when we focus in on New Jersey, one of those states that did legalize. I mean, what are the hopes there in getting things off the ground? Because it's going to take setting up the licensing program and everything else. So what are the timelines there to maybe start seeing some meaningful revenue numbers here in some of these operators that are already in that state?

VIVIEN AZER: Certainly, yeah. New York-- New Jersey has, historically, moved quite slowly. It's very limited in terms of the retail footprint. It's less than 15 currently. But with the bill passing in the state legislature, the 180-day countdown clock begins in terms of formalizing a commercial adult use program. So we do believe that adult use revenues could start to be generated as soon as July 1st of 2021, though, you know, the ramp from a revenue perspective will be tied to cultivation expansion.

AKIKO FUJITA: Vivien Azer, Cowen and Company managing director and senior research analyst, thanks for joining us today.

VIVIEN AZER: Thank you.