Top Cannabis Equity Analysts Discuss Stalled Regulation & The Future Of Marijuana Investing
While the rest of the equities market soars today, marijuana stocks continue to suffer due to a bearish regulatory outlook on cannabis reform for the near-term future.
This week in Ojai, California, an invite-only group of cannabis executives, equity analysts covering the cannabis sector, private investors and more gathered to talk about the future of the industry at Trailblazers 2021. In addition to other conversations — like the one between California’s top executives discussing conditions in the state’s cannabis market — I was asked to lead a panel called “Wall Street All-Stars.”
As a reminder, the cannabis industry is smack-dab in the middle of its conference season, and Trailblazers is one of the crown jewel gatherings for the industry.
Joining me for the resulting lively discussion was Owen Bennett, global tobacco and cannabis analyst at Jefferies; Camilo Lyon, lifestyle brands and wellness analyst at BTIG; Glenn Mattson, VP of equity research at Ladenburg; and Jack Mascone, head of capital markets at Seaport.
Overall, we discussed valuations, company attributes that cause favorable analyst ratings, the choppy regulatory market, new states markets and what they mean for the MSO investment landscape and more.
BTIG’s Lyon started off with a detailed discussion about the current course of SAFE banking and other regulatory considerations, like descheduling, legalization and interstate commerce.
Despite the market’s evaluation that regulation is moving too slowly, which is something echoed by impatient retail investors, Lyon puts the current climate into perspective. Despite how bad things are now, of course, they have been much worse.
“We have sene more momentum and forward movement than we’ve ever seen,” he said. SAFE banking being attached to the NDAA, which is “must-pass” legislation, put Sen. Schumer and his ilk in “an interesting place,” Lyon said. Sen. Booker is adamant that it will not pass without social equity attached to it, and Schumer has people who will stand in the way.
The sentiment from the Street is that the Democrats are screwing up by insisting on social equity. Activists in the cannabis industry argue that it would be exploitative and harmful to communities and the future health and growth of the industry to pass banking reform without considering wider equity provisions.
Overall, Lyon is optimistic that SAFE will pass, especially because the Democrats need a political win and marijuana is always a good bet. “Anything that has Republican support, they should take it,” Lyon said. After some back-and-forth with the other analysts, it was also floated that Schumer may think he can always get it passed later, so it was cautioned overall that SAFE could be stalled until spring 2022.
During a deeper dive on social equity in the industry, Lyon said that it’s too early days for most of these initiatives, so any MSOs with social equity programs have not been able to determine whether or not equity programs have impacted the bottom line positively or negatively. To this point, he added that SAFE is not just a banking bill, it also supports social equity because dispensaries and small businesses cannot get off the ground without meaningful banking reform. “You can’t have a program without support, and that support is capital,” he said.
Seaport’s Mascone echoed this sentiment. “Tying social equity to SAFE is a noble endeavor, but this is a super competitive business,” he said. “The worst thing to do is to not have this [the bill] succeed. People are awarded licenes for the right reasons, and then they can’t get the money?” he said, showing how at it’s core not passing banking could be an impediment to all businesses, not just those at the top.
Jefferies’ Bennett says that for MSOs, implementing “ESG” initiatives will attract institutional investors down the line, so it’s good to get on board early. In an age of shifting politics and the advent of so-called “compassionate capitalism,” institutional investing in ESG stocks is hotter than ever.
Lyon summed the equity question up thusly: “It’s good business to do good for the community.”
Discussion of branding in evaluating companies also took center stage. It was generally agreed upon that MSOs with strong management and good products would be favored long-term. Lyon also commented significantly on his theory that while brands aren’t the market driver right now, they certainly will be in the future.
“Brand development will become the determining factor,” when examining valuations down the line, Lyon said. “In other CPG markets, brands start on the East Coast and then go west. It will be the same in cannabis,” he said, which is in direct opposition to what operators on the West Coast imagine, especially considering the hegemony of cannabis culture on that side of the United States.
Lyon said that brands that focus on quality and value will do well, especially as consumer education is still needed. He added that while branding isn’t the driver right now, he looks at Cookies as the perfect model. “They gained a national following, even though it isn’t a national brand,” he said.
“Think of it like coffee,” Lyon said of current cannabis branding efforts. “We’re in the Maxwell House + Folgers stage. They were the only things 40-50 years ago, now we have all these small craft coffee brands. Tastes and preferences have evolved so much along with consumer education. This is analog to cannabis,” he said.
Ladenburg’s Mattson also emphasized the importance of branding for future MSO success. “Having a national footprint will help them spread their brand across wide swaths of geography. So, for the MSOs, this is much easier,” which is why he thinks the MSOs will be well-prepared for this future reality.
Near the end of the conversation, there was a frank discussion of stock prices and recovery. Can stock prices recover without movement at the federal level? Mascone said, “absolutely;” Mattson said that each consecutive state that comes online will produce “powerful waves;” and Lyon summed it up thusly: “Money has a way of finding value. It’s just taking more time in this industry.”
