• Despite a tough year for the industry, followed by the bigger economic downturn as a result of the coronavirus pandemic, analysts said they're optimistic about the cannabis market today.
• According to Michael Lavery of Piper Sandler, companies have had time to prove themselves and investors have a better idea of how they think the space will play out.
• Cowen's Vivien Azer said that the industry is seeing more institutional interest as a result and that she sees that interest tending to favor the operators that are already profitable.
• Analysts pointed to some companies that they see as having done things right, including Green Thumb Industries, Cresco, Aphria, and Organigram.

Despite the larger economic downturn brought on by the coronavirus pandemic and ongoing headwinds for the cannabis industry, Wall Street analysts said they're optimistic about the ability of some companies to tough out the crisis.

Analysts from Cowen, Jefferies, and Piper Sandler said the cannabis market has become more resilient and attractive to institutional investors. The spoke on a panel at the Benzinga Cannabis Capital Conference on Monday. The analysts also pointed to a handful of companies that they think have been doing things right.

Michael Lavery of Piper Sandler said that at a high level, the cannabis industry right now is comparable to what happened in the early 2000s after the dot-com bust when the bubble burst and then reset.

"There are clearly so many things about this space that are unique and complicated so it doesn't translate perfectly," Lavery said. One point of similarity is that there are numerous subsectors that exist in tech and cannabis, and dominant companies are emerging in individual sectors.

'Cannabis is proving to be quite resilient'

"Within each of those, I think you'll see different winners emerging. Not necessarily ones that are all going to hold a top position forever, but I think we're starting to see some of that separation now getting underway," Lavery said.  

Cowen's Vivien Azer said that the industry is seeing more interest from institutional investors now as a result and that those investors prefer to bet on profitable companies, rather than ones whose pathways to profitability look "a little bit murky." 

Pointing to the market during the pandemic, Azer said that "cannabis is proving to be quite resilient," citing a step up in per-capita consumption trends that's been mirrored by the alcoholic beverages industry, which Azer also covers. 

Owen Bennett from Jefferies said that he thinks there will likely be some "give back" in the sector's performance in the near term, because of how some of the strong performance may be driven by retail and temporary factors rather than fundamentals that companies have set up. However, he said that he is more optimistic about the industry today than he was 12 months ago.

"If we go back a year ago, valuations were high, sell-side expectations were unreasonable, and many companies existed just because money was easy and they didn't really have a strong fundamental outlook," Bennett said. 

Today, Bennett says, the industry looks different because valuations are more reasonable and the companies that are left standing are starting to make a profit while "the bad actors or non-legitimate companies are likely to go bankrupt."

The cannabis companies that stand out

During the panel, analysts also pointed to some companies that have been doing things right.

Cowen's Azer and Lavery of Piper Sandler pointed to Green Thumb Industries (GTI) as an example of a company that's avoided the pitfalls that other cannabis companies have fallen into.

"I think the capital discipline has been exceptional at the company," Azer said. "They've really pursued a more organic growth-focused strategy and they've taken very good care with their balance sheet, having raised capital last April before the capital markets got very tight."

Azer also pointed to GTI's transparent communication to investors as a plus for the company and said that failing to do that has "really burned a lot of the other public companies."  

For Piper Sandler, operators in limited-license US states are the current stand out companies, said Lavery, who also named Cresco as a favorite. 

"I've been surprised by the amounts of LPs that just didn't do the basics right in terms of pulling segmented brands and understanding what the consumer wants and keeping control of costs," said Jefferies' Bennett, who named Aphria and Organigram as his top picks.