Following years of discussion and months of debate in Parliament, recreational marijuana is now legal in Canada. With the curtain lifted after nine decades of prohibition, legal weed sales are expected to bring in billions of dollars in added annual sales. Remember, the industry had already been generating hundreds of millions of dollars from domestic medical cannabis sales and via exports prior to the Oct. 17 legalization.
However, with legalization in the rearview mirror, the attention now turns to how marijuana stocks will grow and differentiate themselves in an otherwise crowded field. To this point we've heard plenty of promises, but we're now ready to see those promises turned into tangible results. This means pot stocks need to have a well-defined strategy and/or competitive advantages to really stand out.
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This small-cap pot stock brings more to the table than you probably realize
You might be under the impression that only the largest marijuana stocks by market cap can offer these advantages -- but you'd be mistaken. A unique small-cap marijuana stock is establishing itself as a prime industry player, and you'd be wise to have it on your radar.
Whereas most cannabis growers are situated in British Columbia, Quebec, or Ontario, since these provinces have denser population totals, investors seem to forget about OrganiGram Holdings (OGRMF +0.00%), which is based in New Brunswick. OrganiGram is the largest Atlantic-based grower, which could give the company geographic advantages throughout the region.
OrganiGram is currently operating two facilities spanning an aggregate of 480,000 square feet in Moncton, NB. Aside from the uniqueness of being an Atlantic-based grower, OrganiGram is also the only major grower (I'll define what I mean by "major" in a moment) to focus its entire production on a single grow site. In total, management is aiming for a run rate of 113,000 kilograms of peak annual production once its four-phase expansion is complete in April 2020.
By producing an estimated 113,000 kilograms when at full capacity, OrganiGram would be considered a major grower. In other words, it should slot in as a top-10 grower by annual volume. Yet, the company's usage of a three-tiered growing system at Moncton is allowing it to produce more per square foot than any other marijuana grower that I'm aware of. By producing in one location and employing its proprietary grow system, OrganiGram could very well deliver some of the industry's lowest-cost production on a per-gram basis.
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OrganiGram sets its sights on Germany
OrganiGram has uniqueness and competitive advantages on its side. The next step is putting its growth strategy into action. Last week, on the day Canada legalized adult-use weed, OrganiGram announced its intent to push into Germany with an investment in privately held alpha-cannabis Pharma GmbH, or ACG.
Under the terms of the agreement, OrganiGram will acquire 8,333 shares of ACG, or 25% of the company, for about $1.86 million. Upon achieving certain milestones, an additional $1 million worth of OrganiGram common stock may be paid to ACG.
Following approval and closing of the investment, the duo will enter into a supply agreement whereby ACG will supply OrganiGram with high-margin cannabidiol (CBD) isolate, and OrganiGram will supply ACG with dried cannabis flower. This dried product can then be sold to Germany's burgeoning medical cannabis consumers.
The move makes perfect sense for both parties. With Canada legalizing only dried flower and cannabis oil for the time being, domestic growers like OrganiGram are incentivized to focus on higher margin oils to drive gross and operating margins higher. Obtaining cannabidiol isolate provides OrganiGram with additional product to reach a high-demand Canadian market. CBD is the non-psychoactive component of the cannabis plant best known for its perceived medical benefits.
Meanwhile, ACG lands itself an investor that benefits from its reaching more consumers in Germany. Not to mention, OrganiGram finds itself a new source for international exports. This is important since export revenue is likely to comprise more than half of the $5 billion Wall Street expects the industry to bring in on an annual basis when fully ramped up.
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But before you buy...
Even though I've gone on the record and plainly stated that OrganiGram is my favorite marijuana stock, I have reservations about its current valuation. Before you consider buying this stock, take into account that it has another 18 months to go before its expansion project at Moncton is complete. Also keep in mind that there's no official timetable as to when Parliament will review additional high-margin consumption options, which could leave growers like OrganiGram reliant on lower-margin dried flower.
Don't get me wrong, I fully believe this company has the tools to succeed over the long run. But I do believe a level of understanding is needed by investors that it'll take time for the industry to mature and companies to differentiate themselves. Even a unique pot stock like OrganiGram must go through these steps, so it'd be best to temper your near-term expectations.
