The wait is nearly over. In just over two months, on Oct. 17, recreational marijuana will be legal in our neighbor to the north, thanks to the Canadian Senate's passage of the Cannabis Act in June. When the industry is operating at full capacity, this legalization could be responsible for adding $5 billion in annual sales on top of what cannabis companies are already generating from domestic medical weed sales and exports.

These lofty revenue expectations are what's behind the rapid rise in marijuana stock prices over the trailing two-plus years.

But, as you're probably aware, no two pot stocks are alike. After scouring the field and regularly keeping tabs on the industry, I've settled on New Brunswick-based small-cap OrganiGram Holdings (NASDAQOTH:OGRMF) as my top marijuana stock. And it certainly didn't disappoint with the release of its third-quarter operating results on Monday, July 30. 

A trimmed cannabis bud lying on a messy pile of hundred dollar bills.

Image source: Getty Images.

OrganiGram delivers record quarterly results all the way around

For the recently ended quarter, OrganiGram wound up generating $2.86 million in sales (3.73 million Canadian dollars), a 93% increase from the prior-year period, as the number of registered patients, dried flower sold, and cannabis oil sold, all hit record highs, while cost on a per-gram basis continues to decline.

For the time being, OrganiGram is completely reliant on domestic medical pot sales, as well as exports. The number of medical patients grew by 18% from the sequential second quarter to 15,316, supplying the company with a larger pool of customers.

But the biggest news was the massive increase in sales of cannabis oils. Whereas dried cannabis is the most commonly thought of way to consume marijuana, dried flower has also demonstrated a high propensity to be commoditized and oversupplied over time. We've seen this happen in Colorado, Washington, Oregon, and even California in recent months, and there's a very good likelihood that it'll happen in Canada, too, once the industry is fully ramped up by 2020. That could mean reduced prices and margins for growers like OrganiGram and its peers. That is, unless they turn their attention to higher-margin cannabis alternatives.

During the third quarter, OrganiGram sold 768,400 milliliters of oil, which was up 39% from the sequential second quarter, and a 452% increase from the year-ago quarter. Even if dried flower becomes commoditized as expected, sales of oils and other alternatives (e.g., edibles and infused beverages, which could be approved by Canada's parliament as soon as next year) could buoy margins for diversified producers like OrganiGram.

A tipped over white bottle with softgel oil capsules pouring out.

Image source: Getty Images.

As for costs, the company reported an all-in cultivation cost, including depreciation, but excluding shipping, packaging, and indirect production costs, of just CA$0.80 per gram. For context, the per-gram flower price in Canada is over CA$8 at the moment.

Lastly, the company's bottom-line also hit new highs. OrganiGram recorded a $1.78 million profit (CA$2.32 million) in the third quarter, which was aided by a fair valuation adjustment on its biological assets and inventory. This works out to CA$0.021 per share, which reversed a year-ago loss of CA$0.023 per share.

A laundry list of things to be excited about

Though OrganiGram's sales are somewhat diminutive next to some of the larger growers in the industry, there's still a lot for investors to be excited about. For instance, the company's growth outlook remains on track. It's currently on pace to produce 36,000 kilograms of cannabis-equivalent production a year, and its three-tiered growing system is allowing it to maximize the potential of its 490,000 square feet of capacity at its Moncton, NB, facility.

Further, construction on its phase four expansion, which actually has three parts, has already commenced. Parts A & B should cost approximately $53.7 million and boost annual capacity to 89,000 kilograms by sometime next year, while the final expansion (part C) will cost nearly $31 million and lift production to an estimated 113,000 kilograms of cannabis-equivalent production by 2020. This should place OrganiGram just inside the top 10 among Canada's largest growers.

An assortment of legal Canadian cannabis products on a counter.

Image source: Getty Images.

As noted, the company is also focused on product diversity and brand-building. In May, OrganiGram outlined its adult-use market strategy by introducing three core house brands: The Edison Cannabis Company, ANKR Organics, and Trailer Park Buds. When it comes to product diversity, CEO Greg Engel foresees roughly half of all medical sales being derived from high-margin cannabis oils, according to a recent email interview.

Investors should also be excited about OrganiGram going on the offensive. It's made a number of strategic investments in recent months, and the company lays out in its third-quarter press release the desire to continue making investments and/or acquisitions for the foreseeable future to further its expansion.

And two ongoing concerns

But even my favorite marijuana stock comes with a pair of pretty serious risks.

First, there's no precedent for a country the size of Canada legalizing recreational pot, so the supply and demand outlook for cannabis is nothing more than guesswork at this point. That means any sort of growth estimates should be taken with a grain a salt.

What's worrisome about not knowing the supply and demand outlook is that it could lead to rampant oversupply and a considerable decline in product prices, just as we witnessed in multiple states in the U.S. that gave the green light to recreational weed. Even though OrganiGram looks to be well diversified, that doesn't mean it's impervious to a substantial decline in per-gram dried flower prices.

A frustrated investor yelling at his computer monitor.

Image source: Getty Images.

The other core concern is shareholder dilution. Prior to passage of the Cannabis Act, access to basic banking services was pretty much off-limits. This meant marijuana stocks solely had to access capital through bought-deal offerings, which involves the sale of common stock, convertible debentures, stock options, and/or warrants. All of these actions result in an increase in the outstanding share count, which can dilute existing shareholders, as well as reduce earnings per share. Because it's unclear how aggressive OrganiGram plans to be on the investment, expansion, and acquisition fronts, it's also unknown how much dilution investors can expect.

To be clear, I still believe OrganiGram is the top marijuana stock, even with these potential flaws. But as I opined recently, I wouldn't necessarily jump at the chance to buy it right now given the choppiness and uncertainties that could rear their heads once Oct. 17 rolls around.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.