With just 12 days left in 2018, one thing is abundantly clear: This has been the "Year of Cannabis."
In October, following years of promises from Prime Minister Justin Trudeau, Canada became the first industrialized country in the world to give the green light to recreational marijuana. Although it's going to take a few years for the industry to ramp up production, we're now looking at a legitimate business model that's capable of billions of dollars in added annual sales.
Within the U.S., residents in Utah and Missouri both voted to legalize medical pot, while Vermont and Michigan legalized adult-use weed during the year. There are now 32 states in the U.S. with legal marijuana in some capacity.
Now that the industry has gained validity, investors turn their attention to which pot stocks should potentially be in their portfolios. Canadian-based Atlantic grower OrganiGram Holdings (OGI -0.67%) is one such name receiving quite a bit of attention. While most marijuana stocks have lost a third (or more) of their value in 2018, OrganiGram has gained 2% through this past weekend. Here are the three big events that stand out as having defined its 2018.
1. A dramatically increased production forecast
Arguably the most exciting news of the year came on March 6, when OrganiGram announced that regulatory agency Health Canada had approved new grow rooms and that based on improved harvest yields, the company was making a positive revision to its peak production guidance.
Prior to this date, OrganiGram was expected to produce 65,000 kilograms per year, which would probably have placed it on the outside of the top 10 producers in Canada. However, following the company's updated expansion plans and yield estimates, OrganiGram raised its peak annual production forecast to 113,000 kilograms. That will, in all likelihood, land the company a spot among the top 10 growers. Said CEO Greg Engel,
We are seeing some harvest yields that are more than 400 grams per square foot a year and have witnessed the quality, density and size of flowers improve tremendously. With these results we are revising our current production forecast estimates as well as those for our next expansion, set to break ground in April 2018, so that by early 2020 we will be producing over 110,000 kg/annum from fully funded operations.
2. The beginning of phase 4 construction at Moncton
If there were a close second to the previous event in 2018, it would be the start of phase 4 construction at OrganiGram's Moncton facility in New Brunswick. As a reminder, OrganiGram has only one grow location at Moncton. It's simply utilized this location to its fullest, with its three-tiered growing system spread out over 490,000 square feet.
According to the company's phase 4 expansion, it anticipates bringing 31 grow rooms online in April 2019, 32 additional grow rooms in August 2019, and a final 29 grow rooms in October 2019. What's notable about this forecast is that, while the projected completion of the second stage of the phase 4 expansion has been pushed back by a month from its timeline announced in March, the overall completion of this project has been moved forward by six months, to October 2019 from April 2020. That's important, since it demonstrates to potentially large-scale buyers that OrganiGram can reach its production targets earlier than expected.
3. Supply deals galore
Lastly, the company announced during its most recent quarterly report that it had signed supply deals with all of Canada's provinces except Quebec. Supply deals will grow in importance as time moves on, because as growers begin to flood the market with dried cannabis flower, finding buyers could become more difficult. The more supply deals growers like OrganiGram have in place, the less worry there'll be about where that production will end up. In essence, these deals supply guaranteed cash flow.
The big question
Of course, the big question is this: Should OrganiGram be on your buy list in 2019? Though I believe pot stocks had overheated across the board, I don't see many growers with a more convincing value proposition than OrganiGram.
As noted, the company is expected to yield 113,000 kilograms from just 490,000 square feet of cultivation space. Mind you, there are other growers out there, which I'll leave nameless, producing only 75,000 kilograms a year from approximately 1 million square feet of grow space. OrganiGram's three-tiered growing system is going to be a major cost saver that could allow it to produce some of the lowest-cost cannabis in the entire industry.
OrganiGram is also devoting quite a bit of its production to alternative options, such as oils. When I spoke with CEO Greg Engel in July, he commented that around half of the company's medical weed sales could be derived from higher-margin oils.
Being somewhat forgotten as an Atlantic-based grower, OrganiGram looks to be relatively inexpensive on a forward-growth basis. That makes it intriguing -- at least to this investor.