Cannabis Musings - May 8, 2023
The loss of Cannabis stock analyst coverage is not a good sign for the industry.
Friends, before we begin, I’d like to invite you to watch me moderate a panel on my favorite topic, one that I’ve been yelling about for years – Cannabis Interstate Commerce. Join us online on Wednesday, May 10th at 2:00ET. It’s free! Register here. It’s an amazing panel, including Matthew Lee and Rafi Aliya Crockett, regulators from California and D.C., and Adam Smith, Founder of the Alliance for Sensible Markets, who’s been tirelessly advocating for interstate commerce in the industry for years.
Shifting gears, you may bristle at my saying this, but we need investment banks. Granted, they’re not saving lives, but they play an important role in the functioning of capital markets. Cannabis companies are most likely going to run across the kind of investment banker who helps them either (i) find money or (ii) buy/sell the company – traditional roles for an investment bank. Very simply, you hire an investment bank because they know where the action is and you don’t, and they’re really good at making you look good in the process. (I-banker readers appropriately kvetched when they read that last sentence for my being so reductionist.)
There’s another side of the investment bank that many usually don’t see unless they’re involved in public stock markets – the research analyst. That analyst’s job is to, well, analyze incredible amounts of data about a particular industry/sector and the public companies within that area, and then make recommendations and projections based on that analysis to investor clients of the investment bank. The more interest that a research analyst can generate among the firm’s clients (particularly institutional investors with lots of assets under management) for a particular sector/stock, the more that capital is invested into those stocks. Ideally, that leads to better investor interest when the issuer wants to sell fresh equity, as well as improved market liquidity, price discovery, and valuations, among other things.
Over the past few weeks, we’ve seen two of the largest investment bank players in the cannabis sector pull their coverage of the cannabis industry (meaning they’re no longer providing research analysis on particular stocks). Cowen, which was acquired by TD Bank in March, announced that it would no longer cover the stocks of US MSOs (Vivien Azer, the Managing Director at TD Cowen who pioneered major investment bank research in the industry, still covers the macro industry and certain ancillary stocks). Just last week, Cantor Fitzgerald followed suit and pulled its research coverage of the cannabis sector after the departure of an analyst.
If you’ve been in this space and/or have been reading these Cannabis Musings for long enough, you know about the capital frenzy of 2017-19, when you couldn’t swing a dead cat without hitting an investor (high net worth, mostly – other institutional investors generally didn’t, and still won’t, play in the field because of the illegality) willing to throw capital at a startup with a license application and a pitch deck. When stocks (of both US MSOs and Canadian LPs) fell back down to earth in mid-2019 and stayed there, the well ran dry and, for the most part, it has stayed that way.
Granted, there’s almost certainly more going on behind TD Cowen’s and Cantor’s decisions to pull coverage than they would or should disclose publicly (I don’t mean that pejoratively), but, to me, these moves further signal that the dearth of professional investor interest in the industry isn’t changing any time soon. Why offer your clients research analysis on stocks that they have no desire to invest in? Unfortunately for the industry there’s an economic logic to it.
There are of course other firms providing research analyst coverage of the sector, and I don’t mean to diminish their importance to the industry. But when two of the largest players hang it up, we should all take notice.
Be seeing you!
Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.