Imagine it's the beginning of 2016. At the time, only 21 companies were licensed to produce and sell medical marijuana in Canada. Of those, only two focused on organic products. And of those two, only one was based in Atlantic Canada. You know that the signs are pointing toward legalization of recreational marijuana. Would you buy that Atlantic Canada marijuana stock?
The stock in question is OrganiGram Holdings (OGI 2.19%). Had you bought OrganiGram in early 2016 and held on, you'd now be sitting on an impressive gain of over 870% in just a little over three years.
Now come back to the present. Canada has already legalized recreational marijuana. Other countries have legalized medical marijuana, with more likely on the way. So should you buy OrganiGram? Here are the key arguments for and against the stock.
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A lot to like
The main reason to buy OrganiGram in 2016 is the same main reason to buy the stock today: It has a tremendous growth opportunity. That opportunity begins at home in Canada.
OrganiGram secured supply agreements for the recreational pot market with all 10 Canadian provinces. That's an achievement that only three marijuana producers can claim. Big marijuana producer Canopy Growth signed a two-year supply deal with OrganiGram for Newfoundland and Labrador.
Over the long run, an even greater opportunity exists in international markets. OrganiGram teamed up with Alpha-cannabis to target the medical marijuana market in Germany. It also partnered with Serbia-based Eviana to purchase up to 25% of the hemp grower's raw cannabidiol (CBD) oil at a 5% discount to the wholesale price. This positions OrganiGram to supply CBD products in Germany and other countries where medical cannabis is legal.
Right now, OrganiGram can produce around 36,000 kilograms of cannabis on an annualized basis. But by the end of 2019, the company's annual production capacity is expected to jump to 113,000 kilograms, probably putting OrganiGram in seventh place among marijuana producers based on capacity.
While capacity is required to generate revenue, controlling production costs is key to making profits. OrganiGram believes it has the lowest cost of cultivation for dried flower (excluding packaging and shipping costs) in the industry. The company's implementation of more automation and its improving crop yield should lead to even lower costs.
OrganiGram could potentially benefit down the road from its partnership with Hyasynth, a Montreal-based biotechnology company that's using engineered yeast strains to produce cannabinoids. This approach could greatly reduce the costs and time for producing cannabinoids compared to the current process of extracting cannabinoids from fully grown cannabis plants.
In addition to all of these pluses for OrganiGram, its stock is also one of the most attractively valued in the cannabis industry. OrganiGram's market cap of around $820 million and its coming annual production capacity of 113,000 kilograms gives investors more bang for the buck than most marijuana stocks do.
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A few reasons for worry
Probably the biggest strike against OrganiGram, though, is that its valuation still reflects an expectation of huge growth. There are several things that could happen to prevent that expectation from becoming a reality.
Initial projections for Canada's recreational marijuana market have already proven to be overly optimistic. One major issue is the limited supply of recreational pot in the country. It's possible that problems could arise for OrganiGram that prevent it from boosting its capacity as soon as hoped.
However, it's only a matter of time before Canada will have a supply glut. When that day comes, OrganiGram and other marijuana producers will have to look to international markets to absorb their excess capacity. But there's no guarantee that these international markets will expand as rapidly as projected.
Although OrganiGram has a relationship with Alpha-cannabis and Eviana in Europe, the company is behind some of its larger peers in building international medical marijuana sales. OrganiGram also doesn't have operations in Latin America at this point, which is likely to be an increasingly important market.
OrganiGram could struggle to keep up with rivals that have relationships with major companies outside the cannabis industry, notably including Canopy Growth. The lack of a deal with a big partner means OrganiGram is at a disadvantage when it comes to cash to expand operations and access to expertise in building successful consumer brands.
Making the call
Despite the reasons for concern, I think that OrganiGram is a buy. Actually, I think it's one of the best Canadian marijuana stocks on the market right now.
My view is that OrganiGram's low production costs will be a significant competitive advantage for the company over the long run. I wouldn't be surprised if OrganiGram is the next marijuana producer to attract a big investment from a major beverage or tobacco company.
There are likely to be bumps in the road, but the global marijuana market will almost certainly grow tremendously over the next 10 to 15 years. OrganiGram appears to be well positioned to capitalize on that growth.
