Why Canadian marijuana stocks will spark up better than u.s. peers

There’s no time l i ke the present when it comes to buying Canadian marijuana stocks, says Neal Gilmer at Clarus Securities Inc. But it won’t be an easy ride for investors.

“We believe that the near term is likely to have material volatility as all of these companies are essentially startups in an infant industry,” he said in a note. “However, we believe that longer-term, early investors stand to be well rewarded for taking on the risk.”

Mr. Gilmer is the latest analyst to initiate coverage on Bedrocan Cannabis Corp., one of the few publicly traded licensed marijuana sellers in the country. He has a speculative buy and $1.50 price target on the stock.

“We expect that the granting of the pending licence from Health Canada for the production facility will be a significant de-risking event that will be a key catalyst in the next three months,” he said. “We believe that will build momentum in the shares and expect investors will eventually move to an EBITDA valuation basis toward the end of 2015 as the earnings profile becomes evident from actual financial results.”

More generally, Mr. Gilmer believes the Canadian marijuana market has greater profitability potential than in the U.S. because of Canada’s low-cost “Amazon.com-style” distribution model.

“With a direct-to-patient shipping model, producers in Canada can capture what would be considered to be both wholesale and retail margins without incurring the costs for real estate for a retail storefront,” he said.

The analyst believes the industry will have constrained supply until 2016, so those that can capture the market in the next 12 to 24 months will have an advantage.

“After 2016, the ability to capture patients will become a major business issue and those with a strong go-to-market strategy will be best positioned,” he said. “It will also be important in the near term to establish brand quality, awareness and recognition.”