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Wall Street’s First Cannabis Analyst Gives Her View of the Sector Now

Cowen’s Vivien Azer has been covering cannabis stocks since 2016 and has lots to say about the prospects for U.S. legalization, as well as her top stock pick.
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Cannabis stocks have had a bumpy ride in 2021.

The benchmark cannabis ETFMG Alternative Harvest ETF  (MJ) - Get ETFMG Alternative Harvest ETF Report peaked at above $34.50 on Feb. 10, before trading down in the $20 range on 4/20, as the volatility that characterized the sector in 2020 has persisted this year. 

Legislative possibilities have driven stocks higher at times as four states -- New York, New Jersey, New Mexico and Virginia -- have legalized cannabis so far in 2021, while other factors such as uncertain federal legalization prospects and pricing concerns have caused volatility. 

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Who better to make sense of all these developments than the first senior analyst at a Wall Street firm to cover the cannabis sector, Viven Azer? 

The Cowen managing director has covered the cannabis industry since 2016, and her firm now provides coverage of U.S. and global firms, as well as Canada's burgeoning adult use market and the CBD market. 

Cowen was also the first traditional U.S. investment bank to provide underwriting and advisory services to the legal cannabis sector, and has acted as the lead underwriter and/or financial advisor on over 20 completed transactions. 

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Azer broke down some of what she sees as the biggest opportunities and challenges for the sector this year. Here is a lightly-edited transcript of our discussion.

What do you see as being the biggest potential catalyst for cannabis companies in 2021?

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It's going to be all of the states that have passed legalization. The green wave coming out of the November election was real. We had five states [New Jersey, Mississippi, Montana, Arizona and South Dakota] that all passed ballot initiatives, including four [NY, NJ, NM, VA] for adult-use cannabis. 

Subsequently in the early part of 2021, we saw New Jersey legalize, New Mexico legalize, [as well as] New York and Virginia. So it's already been a very active 2021. For the remainder of the year, we think Connecticut and Rhode Island could also pass legalization. 

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Conversely, what do you see as the biggest speed bumps for the industry this year?

It's going to be the pace of legalization. Coming up with individual, state-level cannabis frameworks is a process. That's really just the first step in terms of scaling legal adult use market. The operators also have to scale their own cultivation and production. So that takes a number of months up to a year. 

Which company is your top stock pick?

Green Thumb Industries  (GTBIF)  is our top pick -- they are one of [only] ten cannabis license holders in New York, which is poised to be a multi-billion dollar market. We think that Green Thumb has a really nice geographic mix and an attractive profitability margin. They are not the largest operator in the space in terms of the number of doors (places where the brand retails), but they do have a healthy geographic mix operating across a dozen states, and they have a solid EBITDA margin.

What kind of timeline do you see for legalization? 

We're not calling for [legalization] in the 117th Congress, but we do think there is an opportunity to find bipartisan support for some improvement in the federal landscape. Specifically, we are looking for a modified version of the STATES Act that would decriminalize cannabis. It would still be federally illegal, interstate commerce still wouldn't be allowed.

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But it would make life a lot easier for the publicly-traded U.S. operating companies. As part of that legalization bill, you would get access to commercial banking and insurance, [and] you would have a change in the public tax code that would be beneficial for the public operators. You get the introduction of a federal excise tax and it would likely allow for the re-listing to U.S. exchanges for U.S. operators who are only traded OTC in the U.S. and secondary exchanges in Canada.