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Is OrganiGram Holdings Inc. a Buy?

By Keith Speights – Sep 27, 2018 at 6:35AM

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OrganiGram hasn't generated as much buzz as bigger Canadian marijuana stocks. But that might not be a bad thing.

You might think that OrganiGram Holdings Inc. (OGI 0.39%) is kind of boring compared to some marijuana stocks. After all, OrganiGram hasn't seen its share price skyrocket as a result of a short squeeze. It hasn't been in the headlines day after day. 

But for many investors, OrganiGram's year-to-date return of more than 60% is anything but boring. The company now claims a market cap of more than $650 million after the nice run so far in 2018. Is OrganiGram still a buy now, though?  

Marijuana leaf on top of $100 bills.

Image source: Getty Images.

A lot to like

The obvious opportunity for OrganiGram is in Canada's recreational marijuana market, which is scheduled to open on Oct. 17, 2018. There are two keys to prospering in that market: capacity and distribution channels. OrganiGram appears to be in great shape on both fronts.

OrganiGram's current production capacity is a respectable 36,000 kilograms per year. However, the company should be on track to boost that capacity to 62,000 kilograms per year by April 2019. And by October of next year, OrganiGram expects its annual production capacity will be 113,000 kilograms, making it the seventh-largest Canadian marijuana grower in terms of capacity.

The company has also been quite successful in securing supply agreements for distribution of its cannabis products. OrganiGram landed a spot on the list of licensed producers winning a supply agreement with Ontario's only online retailer. It also has supply agreements in place with Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.

OrganiGram's agreement with Newfoundland and Labrador attracted the attention of the biggest player in the Canadian marijuana industry, Canopy Growth. The two companies signed a two-year supply and distribution agreement in which OrganiGram will supply cannabis products to Canopy's Tweed retail operations in Newfoundland and Labrador.

International medical marijuana markets present an even greater opportunity. OrganiGram partnered with Alpha-Cannabis to export medical cannabis to Germany, which is the most populous country in the European Union and has the biggest marijuana market outside of North America. It also teamed up with Cannatrek Medical to export medical cannabis to Australia.

OrganiGram has made several strategic investments that could position it even better in the global medical marijuana market. One notable example is OrganiGram's investment in Hyasynth Biologicals, which has developed biofermentation technology to produce cannabinoids at a fraction of the cost of traditional methods. 

But some risks, too

There definitely are some risks associated with buying OrganiGram, though. One is that Canadian recreational marijuana demand might not be as great as many expect right out of the gate. Canada won't allow the legal sale of cannabis edibles and concentrates for vaping when the recreational market opens in a few weeks. Regulations for these products won't be finalized until sometime next year. It's possible that this delay could negatively impact recreational marijuana demand.

Perhaps the more significant risk, though, is the potential fallout that could occur when supply eventually catches up to and surpasses demand in Canada. While this won't be a problem in 2018 or 2019, within the next few years, the Canadian marijuana market is likely to face a supply glut.

When this happens, companies will need to turn to international medical marijuana markets to sell their excess capacity. The good news for OrganiGram is that it does have partnerships in place in several key international markets. However, there is a chance that even these global outlets won't be enough to keep the company's momentum going.

In addition to these risks, it's possible that OrganiGram could find its share price weighed down in the midst of a broader pullback in marijuana stocks. Several of these stocks now have astronomical valuations. Any bump could cause the stocks to plunge. Even though OrganiGram looks like a bargain relative to many of its peers, it could be pulled down in a sell-off of more expensive marijuana stocks.

Is the stock a buy?

For more conservative investors, the risks associated with OrganiGram (and with marijuana stocks in general) are too great. But for aggressive investors willing to take on higher levels of risk, I think OrganiGram could be a pretty good pick.

I view OrganiGram as a potential dark-horse candidate for major beverage companies that could seek a cannabis partner, with Diageo ranking high on that list. That's not a reason to buy OrganiGram by itself, but it's definitely a wild card that could deliver a big catalyst for the stock.

OrganiGram stock could experience considerable volatility down the road. My take, though, is that the global cannabis industry will continue to expand over the long run. Companies with significant production capacity and a presence in international markets should enjoy solid growth. I think that OrganiGram has a pretty good shot at being one of those long-term winners.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.

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