Cowen Managing Director & Senior Research Analyst Vivien Azer joins Yahoo Finance to discuss why recreational marijuana continues to be a bipartisan issue and weigh in on the outlook for the cannabis industry.
ZACK GUZMAN: We've been talking a lot about the election and certainly what it means for the presidency, but want to focus in on one key sector that was waiting with bated breath to see how this election cycle was going to go. That's the cannabis sector. As we noted yesterday, five states had ballot measures putting up that question to voters here in terms of cannabis legalization. All five of them passing the ballot measures there to legalize marijuana across Arizona, Montana, New Jersey, South Dakota as well as measures in Mississippi there, increasing the states that now have legal marijuana actions coming down the pike here.
So what does it mean for the industry? As you weigh that pro con here, the con, the industry did not necessarily get that blue wave that they were hoping for it to lead to possibly federal legalization, and we're seeing that play out across the sector. Want to break down though some individual names with our next guest, marijuana's top analyst here, Cowen Managing Director and Senior Research Analyst Vivien Azer joins us once again. And Vivien, it's going to be chatting here. Obviously, it was a late night for you, late night for me, late night for a lot of people watching this shakeout. But first, what's your reaction to seeing a clean sweep in these states that did let voters weigh in on the idea of legalizing cannabis?
VIVIEN AZER: Hi, thanks, good to be back with you. I find it particularly encouraging. As we saw with 2016, again in 2020, cannabis continues to be a bipartisan issue, and we were positively surprised by the outcomes in Montana and South Dakota.
ZACK GUZMAN: Yeah, you mentioned South Dakota. I mean, that's a state that President Trump looks to take, I mean, it was already called, but taking by about a 2/3 margin there, a state that hasn't gone blue since 1964, so it's deep red state, and they passed their cannabis measure here. So talk to me about how that might shake out, because I know we didn't get that blue wave that you were talking about potentially. I mean, when we look at these results, they're still going to be coming in, but not as strong as people in the sector were hoping for. So how does maybe the even swing, the Republican support here in states like South Dakota you're talking about, how does that maybe change the way that investors should be looking at?
VIVIEN AZER: Sure, so you can see for the US listed names, broadly in the green today. I think that's a reflection of what happened at the state level, and understanding, you know, that from a competitive standpoint with, you know, the outlook probably diminished in terms of federal progress, you don't have to worry about, you know, large multinational, you know, multibillion dollar CPG companies entering the space. So it continues to be, you know, these lulled opportunities. New Jersey I think is the one that the publicly traded stocks are responding to most, but that win in South Dakota I think really reinforces the polling data, you know, that we've consistently seen from Gallup where, you know, well north of 60% of Americans do indicate that they support adult use cannabis.
ZACK GUZMAN: Yeah, I'm glad you mentioned some of these names here, because you've highlighted them in terms of your out-performers here in Curaleaf, Green Thumb Industries, and you look at New Jersey, obviously, it's going to be the biggest market size added to the total addressable market here once that comes through. Now, the voters voted in favor of legalizing, but when you look at that, how quickly do you think it will be a boost to some of these companies since it sounds like it's going to be till January of next year before this actually becomes legal, but sales will start trickling in, so talk to me about those companies best poised here to take advantage of New Jersey now having legal cannabis.
VIVIEN AZER: Sure, so we have a number of publicly traded companies, but you're absolutely right, Green Thumb is positioned well there, Curaleaf, Acreage all have dispensaries up and running. The rule under medical cannabis is you get one license, and that gives you two more satellite dispensaries, so GTI and Cura each have one, Acreage has two, but all of them can build out to three, and we would expect that that work, as well as the expansion of cultivation, would get underway sooner rather than later. That does take time. New Jersey is a massively under-penetrated medical market which provides a lot of upside on the adult side. So to put it in context, they've got about 86,000 patients. States like Pennsylvania and Florida have well north of 300,000, in Florida's case, 400,000 patients. So there's a lot of opportunity to expand the market. And of course, nearby New York certainly will fuel that market as well.
ZACK GUZMAN: And just because, you know, we have a lot of viewers who watch this, maybe some investors who got burned in cannabis stocks before, I want to take a step back and just kind of look at maybe some of these catalysts, because there was the catalyst hope that we would see this big blue wave, we'd get national legalization on the agenda here coming up next year. Doesn't seem to be panning out, but when you step back and look at maybe some of the risks now in terms of where these stocks are trading, talk to me about maybe how this becomes a moment for some of those US based companies that you were just discussing there, because we're seeing Canopy Growth now, the Canadian giant here that's been waiting to get into the US market here, on that triggering event of national legalization, so talk to you about how it maybe shifts the way investors should be looking at this now and how some of those multi-state US based operators might enjoy even some of these states coming on board now.
VIVIEN AZER: Sure, so you know, we've been cautioning investors on the run in the Canadian cannabis names. We didn't think that was warranted. Our base case scenario going into the election was a modified version of the STATES Act which would have made it easier for states to legalize, but it would have still precluded interstate commerce, it wouldn't have changed the scheduling, which would have meant that the international operators couldn't compete in the United States. So we think that was kind of just bad read from the market going a little bit too far.
We didn't think even with a blue wave you would get that kind of progressive change out of the gate. So what we're focused on right now is, you know, turning these new markets on. The US valuations are far more compelling than the Canadians. They're still trading at a substantial discount, you know, despite the fact that the addressable market in the US is multiple times bigger than Canada, and the best in class you have operators are far more profitable than the Canadians.
ZACK GUZMAN: Yeah, last question to you on that profitability front, because I was chatting with True Leaf CEO, the Florida based marijuana company there, talking about Section 280 when we talk about the tax policies tied to this, so this might be getting into the weeds, but when you talk about profitability, the big reason why investors were excited about legalization would be that they wouldn't have to pay those crazy high tax rates, because it's still illegal at the federal level. So talk to me about that, because she said it would have changed their tax bill by about 37%. It would've been $16 million in the year that they'd be saving if that change came through. So without it, what does profitability look like for some of these companies now.
VIVIEN AZER: Yeah, so it's going to be status quo, we think, from a tax policy perspective, which is why investors generally focus on adjusted EBITDA, which doesn't contemplate the onerous tax regime that comes with 280E. It's hard to envision a pathway with a Republican Senate where that can stretch.
ZACK GUZMAN: All right, Vivien Azer breaking it all down. Clearly an exciting day, regardless, as more states add to the growing number of states that have legal cannabis there. But Vivien Azer, Cowen Managing Director and Senior Research Analyst, appreciate you chatting that.