Source: financial post | March 20, 2015 |

Canadian investors know all about medical marijuana. Our equity markets have been flooded with companies peddling the stuff over the past year in what has been jokingly called the “Dot-Bong Bubble.”

But next week brings something entirely new to this country: a recreational marijuana stock.

You read that right. Nutritional High International Inc. completed a $1.6-million initial public offering earlier this month, and trading will commence as soon as Monday on the Canadian Securities Exchange.

The stock gives investors exposure to the unbounded world of legal pot in the United States, a far cry from the intensely regulated, quaint little cottage industry of medical marijuana companies that have sprung up in Canada.

“From an investor standpoint, we obviously feel the recreational market offers much more upside compared to the Canadian medicinal marijuana market,” David Posner, chief executive of Toronto-based Nutritional High, said in an interview.

“We have a large investor base in Canada that was very interested in getting into the U.S. marijuana industry, and we wanted to create a vehicle for that.”

On the surface, it might seem odd that this company listed in Canada at all since recreational marijuana use is still illegal in this country.

But Canada has become the destination of choice for pot companies of all stripes. When the federal government introduced rules last year that required patients to buy medical pot from licensed producers, it essentially birthed an industry and drew dozens of new entrants. Bay Street became the world’s leading source of financing for marijuana.

Crucially, the companies that go public here have to be more transparent and provide far more disclosure than the over-the-counter market in the U.S., where fraud is commonplace. That provides the legitimacy and investor confidence that Nutritional High was looking for.

Plenty of investors are still skeptical of medical marijuana stocks, never mind recreational ones. But give Nutritional High credit: it did an IPO with a full and detailed prospectus, the first Canadian pot company to do such a thing. None of the others provided anything close to the same level of disclosure, despite the tiny size of this offering.

“There’s a lot of skepticism [about marijuana stocks], because there are a lot of companies that have not fulfilled their securities law obligations. So I think a strength of our company is our approach,” said Adam Szweras, Nutritional High’s corporate secretary. He added that Canadian regulators did a “very thorough” review before approving the IPO.

Nutritional High’s focus is the market for edibles and oils in Colorado, where pot became legal last year. Anyone who enjoyed Walter White’s adventures will get a chuckle out of the firm’s names for its chocolates and hard candies: planned product lines include Breaking Bud and Heisenberg Blue.

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“Their branding is the bomb,” said Chris Parry, director of editorial at Stockhouse Publishing Ltd. (Nutritional High is a Stockhouse client, like many other public marijuana firms).

But edibles are a serious business, one that offers much bigger margins than traditional weed. According to Nutritional High’s numbers, recreational pot in Colorado sells for roughly US$5 to US$7 a gram. By comparison, oil products sell for US$20 to US$30 a gram and edibles sell for US$25 to US$30 per package.

Demand for edibles has also been much more reliable than for the plant itself. When the drug was legalized last year, edibles sold out in a matter of days, while pot was available everywhere.

Colorado’s edibles business is highly fragmented with a lot of small players, and there have been some issues with their products (notably, some people have consumed too much THC). Nutritional High thinks the sector is begging for a larger player that can churn out reliable and standardized products.

“There’s a gap in where the edibles are and where they need to be taken,” said Melissa Parks, the company’s head chef and a celebrity in the world of cannabis cuisine. “To come in with the edibles knowledge, and the machinery and know-how as far as food goes, really puts us at an advantage in comparison to some of the other companies.”

But, ultimately, investors hope this story is about more than Colorado. The idea is to get exposure to a sector that could significantly grow as pot laws are eased in an increasing number of states, and perhaps in Canada as well. If Nutritional High can build a successful base for its edibles business in Colorado, it could have a competitive advantage as it expands into other regions.

Despite being Canada’s first recreational pot stock, it won’t be easy for Nutritional High to boost its profile. The hot money that inflated this country’s marijuana sector into a giant bubble last spring is long gone, and investors are being more selective.

Nutritional High is also still months from making significant revenue, and the industry could look different by then. This company may be a stoner’s dream, but investors hope their high will be equally fun.

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