Fewer research analysts covering cannabis underscores industry woes

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Cannabis industry earnings calls have been a little quieter this year.

Fewer research analysts are covering the U.S. marijuana industry, which experts say reflects the challenging economic headwinds facing the industry, including high taxes, high interest rates, rock-bottom stock prices and the slow pace of federal MJ reform.

New York-based Cantor Fitzgerald and Cowen are among the more notable financial-services firms that have dropped coverage of U.S. plant-touching cannabis companies.

“It speaks to the unhealthy state of our industry,” Jesse Redmond, the managing director of the cannabis sector and head of research at Florida-based Water Tower Research, told MJBizDaily.

U.S. cannabis stocks have taken a beating in the past 18 months.

The AdvisorShares Pure US Cannabis ETF – which tracks major U.S. marijuana stocks under the symbol MSOS – has fallen to just over $5 from a high of more than $56 in February 2021.

In addition, cannabis companies are increasingly turning to debt financing rather than equity raises, which means there’s a smaller audience for research.

Low share prices and fewer mergers and acquisitions, initial public offerings and other types of banking activities mean there’s less revenue to fund research, Redmond said.

“Without that activity, there aren’t the revenues to justify paying the person to write the research,” he said.

The recent shake-up includes:

  • New York-based Cantor Fitzgerald, which has stopped covering all U.S. marijuana companies except for WM Technology, which operates the Weedmaps platform, after the departure of analyst Pablo Zuanic.
  • New York-based Cowen, which was recently acquired by Canada-based TD Bank, is no longer covering U.S. cannabis companies. But analyst Vivien Azer will include the industry’s larger trends as part of her beverages, tobacco and cannabis portfolio.
  • Jon DeCourcey, a former analyst covering the cannabis industry, is no longer with financial services firm BTIG, which specializes in investment banking, institutional trading and research. He is now head of investor relations at Florida-based multistate cannabis operator Ayr Wellness, according to DeCourcey’s LinkedIn profile.

Neither Cantor Fitzgerald, Cowen nor BTIG responded to requests from MJBizDaily for comment.

Many other financial-services firms are still providing coverage of U.S. plant-touching companies, such as Florida-based Water Tower Research, New York-based capital markets company Viridian Capital Advisors, Toronto-based Echelon Wealth Partners and Vancouver, British Columbia-based Canaccord Genuity.

Analysts have been ‘a little too optimistic’

When Cowen became the first big financial-services firm to initiate coverage in 2019, investors said it lent legitimacy to the burgeoning industry.

Back in 2019, both operators and service providers were optimistic that federal legalization and/or the SAFE Banking Act would be passed in Congress.

Industry officials also were increasingly hopeful that big institutional investors would take an active interest in the U.S. cannabis industry – a move that could have provided key funding to companies.

But none of that has happened.

Instead, retail investors still make up the bulk of investment in U.S. cannabis, Water Tower’s Redmond said.

And retail investors can often access research only if they pay for it or are clients of the financial-services firm producing it.

That optimism might have also bled into analyst research.

“We’ve all been a little bit too optimistic,” Redmond said.

Between price targets and predicting the passage of SAFE Banking, many analysts through the second half of 2022 underestimated the impact of factors such as high interest rates, falling wholesale cannabis prices and high taxes.

“I think that even the ones that were doing the research and getting it out, maybe it wasn’t that helpful for people,” Redmond said.

Cannabis ‘not ready for prime time’

But the industry has other issues in addition to overly optimistic forecasting from analysts and slow movement on federal cannabis reform, Matt Karnes, founder of New York-based cannabis financial consultancy Greenwave Advisors and a former sell-side and buy-side analyst, told MJBizDaily.

Plenty of cannabis companies are still finding their footing, he said, pivoting out of oversaturated legal markets and looking for promising paths to profitability.

Another sign of the industry’s immaturity?

A disproportionate number of cannabis companies have restated their financial results, he said, showing that the industry is still mastering the accounting intricacies of the sector.

“You make your investment based on what comes out on a quarterly report,” Karnes said.

“And then two quarters later – oops! How is that supposed to give any investor confidence?”

With fewer analysts covering cannabis, Karnes said, it could contribute on a small level to the enormous difficulties U.S. plant-touching companies are having attracting investment in the industry.

But, he noted, there are still analysts covering U.S. plant-touching operators, such as Matt Bottomley at Canaccord Genuity and Andrew Semple at Echelon Wealth Partners.

“It’s a slight incremental negative,” he said of the impact on raising capital.

“But I don’t think the industry was necessarily ready for prime time.”

Kate Robertson can be reached at kate.robertson@mjbizdaily.com.