The marijuana industry had nothing short of an unforgettable year in 2018. When the curtain closed, Canada had become the first industrialized country in the world to legalize recreational marijuana, the U.S. Food and Drug Administration (FDA) had given the green light to the first cannabis-derived drug, and President Trump signed the Farm Bill into law, legalizing hemp and hemp-based cannabidiol oil.

Interestingly enough, even though the cannabis industry was validated as a legitimate business model, it didn't help marijuana stock investors last year. In fact, 10 relatively well-known pot stocks lost at least half of their value.

Of course, there were exceptions. Atlantic-based grower OrganiGram Holdings (OGI -2.24%) wound up gaining 10% in a year where the broader market dropped for the first time in a decade. The question is: Can OrganiGram continue its steady move higher in 2019? There are valid arguments to be made on both sides of the aisles, so let's take a closer look.

Two rows of dried cannabis buds lying atop neatly arranged hundred dollar bills.

Image source: Getty Images.

OrganiGram is one of the cheapest and overlooked pot stocks. Period.

As noted, perhaps the most compelling reason to consider buying OrganiGram is the company's value proposition. Located in New Brunswick, OrganiGram expects to yield 113,000 kilograms per year once the three-stage, phase-four expansion at its Moncton facility is complete. This will place OrganiGram safely among the top 10 producers by total output at peak capacity in Canada.

But what's truly a jaw-dropper is that OrganiGram's market cap, despite this amount of production, is approximately $535 million. There isn't another cannabis grower with a lower market cap that's expected to be a top-tier producer. Period. In fact, Cronos Group, assuming its $1.8 billion equity investment from Altria closes, could have a market cap of roughly $4 billion -- yet it will be producing an almost identical peak amount of cannabis as OrganiGram. This suggests that Wall Street is overlooking OrganiGram big time (or perhaps grossly overvaluing Cronos).

OrganiGram also offers what might be the lowest weed production costs in the industry. To begin with, OrganiGram only is operating at a single grow site in Moncton. By having its production centralized in one location, the company minimizes shipping and supply-chain expenses.

More importantly, though, it's employing a three-tiered growing system at Moncton that's more effectively utilizing its grow space. Its 113,000 kilograms of annual output will be produced over just 490,000 square feet of capacity. There are other growers that have 1.3 million square feet of capacity that won't be yielding the same amount of annual output. This suggests that OrganiGram's production costs per gram should be substantially lower than most (or all) of its peers.

Investors also would be wise not to overlook OrganiGram's efforts to diversify its portfolio into higher-margin products. In an email interview last year, Greg Engel, the company's CEO, suggested that half of the company's revenue from medical cannabis consumers could come in the form of high-margin oils.

With a forward price-to-earnings ratio of less than 17, OrganiGram looks genuinely attractive to fundamentally focused investors and growth seekers.

An accountant chewing on a pencil while closely examining figures from a printing calculator.

Image source: Getty Images.

Even cheap marijuana stocks face risks

Then again, even the most fundamentally attractive pot stocks bear risks.

One of the bigger concerns for investors is the prospect of share-based dilution. Even with recreational marijuana now legal in Canada, access to non-dilutive forms of financing are still limited. And most marijuana companies aren't generating anywhere near enough in operating cash flow to fund capacity expansion projects, new product development, a push into international markets, or acquisitions. This means companies like OrganiGram have had to raise capital via bought-deal offerings, whereby common stock, convertible debentures, stock options, and/or warrants are sold to an investor or group of investors.

Since Sept. 1, 2016, OrganiGram's outstanding share count has grown from 84.7 million to 125.2 million in Canada. This has the effect of weighing down on the value of existing shares, as well as reducing earnings per share (if the company is profitable). Investors can expect share-based dilution to remain an issue with the entire weed industry for many quarters or years to come.

The company's location also could be a double-edged sword. Because it's located in Eastern Canada, OrganiGram gets a geographic market-share advantage in the country's lesser-populated eastern provinces and territories, but it may make it less appealing from a partnership perspective. In recent months, Altria, Anheuser-Busch InBev, Novartis, Constellation Brands, and Molson Coors Brewing Co. all have struck joint ventures, partnerships, or equity investments with cannabis stocks. Given OrganiGram's location, it could struggle to get noticed by brand-name companies in the beverage, tobacco, or pharmaceutical industries.

Lastly, the black market could prove troublesome for OrganiGram and the entire industry. Early-stage supply shortages in Canada are likely to encourage some consumers to purchase marijuana from the black market. Illicit producers don't have to pay federal excise or income tax or have to wait on cultivation licenses or sales permits. This means they can undercut legal channels on price and also can step in when legal producers are short on supply. The end result could be lower near-term sales estimates for pot stocks like OrganiGram.

Dice that say buy or sell being rolled atop a digital screen showing stock charts and quotes.

Image source: Getty Images.

The verdict?

So what's an investor to do with OrganiGram?

On one hand, OrganiGram offers an incredible value proposition and the strong likelihood of some of the lowest production costs on a per-gram basis in the industry. On the other hand, share-based dilution remains an issue, and OrganiGram is far from a lock to land a brand-name partnership in the new year.

After weighing both sides, I view OrganiGram Holdings as one of the top buys in the marijuana industry. Make no mistake about it -- things will be bumpy at times. The company's cash needs could result in ongoing dilution that could temporarily limit OrganiGram's upside. But its value-to-output proposition, coupled with its exceptionally low forward price-to-earnings ratio, simply can't be matched.

As long as your investment horizon extends a few years, I believe you'll "see the green."

Check out all our earnings call transcripts.