Cowen Managing Director and Senior Research Analyst Vivien Azer joins Yahoo Finance’s Zack Guzman to discuss how weed stocks may be impacted by upcoming political elections.

Video Transcript

ZACK GUZMAN: I want to focus in on one issue that is getting a lot of attention as we are talking about tax shortfalls here, tax revenue shortfalls for a lot of states across the country, as some might be looking to turn to legalizing cannabis and tapping that opportunity to bring in a little bit more money to close the gap on funding here. And we are seeing that play out as we see the discussion in the polls, you know, democratic nominee Joe Biden pull a little bit farther ahead of President Donald Trump. And that has fueled shares of Curaleaf right now up 168% percent off their March lows. That of course being one of the leading-- the largest cannabis companies here in the US.

But what really should we be focusing on? Maybe it's not the presidential election, but what's going on in the Senate and what could shape up there as a blue wave can lead to some pretty radical change on a federal level here. Joining us now for more on that is our next guest. Vivian Azer as Cowen managing director and senior research analyst with the focus here, one of the most widely followed analysts in the cannabis space.

And Vivian, I guess a lot of people would talk about the battle between Joe Biden and President Trump. But why does the Senate maybe matter more when we think about what could happen in cannabis legalization?

VIVIAN AZER: Sure, thanks for having me. Yeah, no, the Cowen view is that the Senate fundamentally is going to be more important actually than the presidential race in terms of changing federal policy. Currently, cannabis is designated as a schedule I controlled substance. Last week, Joe Biden and Bernie Sanders published a unified agenda. It's just a proposal, but it does address cannabis.

We hosted a policy summit yesterday that dug in to that. Interestingly, it is supportive of rescheduling not a de-scheduling. But if the Democrats do take the Senate, it gives the Democrats a lot more flexibility to take the more aggressive measures in terms of either passing the Moore Act, which would include some pretty meaningful remedies from a social justice standpoint as well from a tax standpoint. So critical for the Democrats to take the majority. And then we could see some pretty fundamental change post the election.

ZACK GUZMAN: Well, I mean, it's not even just. And I know, you know, a lot of people in the marijuana space would want to see it legalized federally. But we were also watching the safe banking act. That would give access for a lot of these cannabis companies to banking here in the US. Even something like that would be a big boost according to CEOs that we've chatted with here. But when you think about what companies might be poised to take advantage of whatever legislation we get that would make the jobs of these companies a little bit easier, what are you thinking in terms of which ones we should be watching because as we open with Curaleaf here, seems to be one that's point is just in terms of their footprint to really move rather quickly if we do get changes on that front?

VIVIAN AZER: Certainly, Curaleaf would be one of the names that I would suggest. We have an outperform rating on that. The other two names that we like amongst the US operators would be the Green Thumb Industries and Cresco. Those are three of the biggest operators in the US. They all have a presence in a dozen or more states, Cure being the biggest one with over 50 operating dispensaries today. That should grow to almost 90 with the closing of the Grassroots acquisition.

All three of them are EBITDA-positive. So the benefit of already being profitable and having some pretty meaningful scale on a multi-state basis that should position Curaleaf, Green Thumb Industries, and Cresco to benefit from any potential change.

ZACK GUZMAN: Yeah, and when we look at it overall. I mean, the Marijuana Alternative Harvest ETF is one that's here that I guess is watched. That's still down pretty notably from what we saw back when cannabis stocks were operating pretty hot in the space. But when we look at it, I mean, I guess the question would become, when is the tide turning here because I've noticed a pretty significant wave of cutting price targets in a lot of these over the last couple of months from you guys.

So I mean, we haven't seen a lot of movement in the opposite direction, even though we opened with a little bit of the moves in Curaleaf and some of these other multi-state operators. But at what point do you think we might start to see continued momentum since we are seeing these cannabis companies still operate even in lockdown states since it's deemed, in some of those, important enough to continue operating?

VIVIAN AZER: Yeah, so you know, last quarter, calendar 1Q, Curaleaf actually delivered revenues in line with our expectations. I would say, broadly, if you're looking at consensus estimates, there has been a cycle of negative revisions. In part, that's a function of delayed closing of M&A. Pending acquisitions have taken longer to clear DOJ. And so to the extent that some of my peers were kind of baking in an expectation for a deal to close and then it gets pushed out by a quarter or two, you know, that necessarily put some pressure on estimates as you would look at them evolving over time.

That said, from a COVID standpoint, it's very market-specific. So since we started with Curaleaf, I'll focus on that one. You know, they did have disruption in their markets in Massachusetts and Nevada. You know, Massachusetts had shut down adult use. That was obviously problematic. And that would drive a negative revision to revenues. And then in Nevada, they eliminated in-store purchases and they had to shift to a delivery model. And while there was nascent delivery in that marketplace, all of the operators had to scale up their capabilities there. And that did cause some disruption, on top of which you know there was basically no tourism in the marketplace for a couple of months.

ZACK GUZMAN: Yeah, lastly, I'd be remiss if I didn't sneak in a question about the Canadian LPs here too. We talk about them because they're really the first ones that we got to see. Now the US is coming up in terms of their operations here as well. What's your take on those and how there might be a little bit of a power change here as we see the US market continue to grow and Canada is limited in size? So are you seeing that kind of shift now as the US companies mature?

VIVIAN AZER: Certainly from an investor standpoint, I'm seeing more interest in the US names as the election approaches and there's kind of a more tangible catalyst. For the Canadian operators, they're still working through some of the kinks in the industry. Year one, arguably, was a disappointment. There weren't enough stores. The cultivation capacity didn't ramp as quickly as, I think, the companies had anticipated. And the quality of the original crops were not meeting consumer expectations.

The market has evolved. They've now introduced novel 2.0 products as of January of this year. So that's vapes and beverages and edibles. That's certainly helping. The other thing that's really helping is that the LPs are introducing a much more affordably priced flower in the discount and deep discount segments. And that's driven some more consumers to lead the illicit market and enter the legal market.

ZACK GUZMAN: Very interesting list of catalysts here as we wait to see how the election shapes up in 2020. But Vivian Azer, managing director and senior research analyst at Cowen, appreciate you taking the time to chat.