The past several months have been tough for OrganiGram Holdings (OGI -0.75%) shareholders. The stock has tumbled around 64% since a peak it reached this May, but better days could be around the corner.
The stock popped recently in response to a rating upgrade from Ryan Tomkins at Jeffries. The investment bank analyst pinned a price target to Organigram stock more than twice its present value.
Is Organigram Holdings really on the right path to providing market-thumping gains? To answer that, we'll start by looking at the Canadian cannabis producer's highlights.
Reasons to buy
Over the past year, it's become painfully clear that the Canadian market for licensed cannabis isn't large enough to support a handful of the country's largest producers. That hasn't stopped Health Canada from granting cultivation licenses to 196 businesses.
Despite the intense competition for a limited number of cannabis consumers, Organigram has consistently reported operating profits, at least on an adjusted basis. You're probably thinking that simply making ends meet isn't a big deal, but during the latest round of earnings reports, Organigram was one of just two Canadian producers to report an operating profit.
The company's fiscal third quarter, which ended in May, wasn't its first successful period, either. In fact, Organigram is the only big producer in Canada to consistently report an adjusted operating profit each quarter since Canada began allowing adult-use cannabis sales last October.
Organigram finished May with CA$87.8 million in cash and short-term investments after producing a CA$22.9 million net profit during the nine-month period that ended May 31, 2019. This isn't an enormous sum, but it is growing and could go a long way once the company's peers begin divesting assets at fire-sale prices.
At the moment, Organigram has all the space it needs to stretch out. In 2020, the company will be able to grow 113,000 kilograms per year.
Reason to wait
Companies that spent the past couple of years buying every marijuana-related business they could find at inflated prices are bleeding money, and inventories are piling up along the supply chain. Cannabis products begin losing potency as soon as they're separated from a live plant, and there's a good chance that marijuana stocks will continue sliding in response to inventory writedowns in the year ahead.
During the nine-month period between the end of October and the end of July, Health Canada saw dry flower inventories rise triple to 347,171 kilograms at the end of July. That's enough to supply the entire country at its present rate for more than two and a half years.
Organigram finished May with enough dry flower in inventory to last several months, so it's clearly not one of the companies producing lousy cannabis that it can't sell. That doesn't mean the stock won't get pulled along with its peers.
Where Organigram Shines
Producers don't like to talk about it but maximizing production at new cultivation facilities involves a great deal of trial and error. Anybody can throw some seeds in a pot of dirt and grow some cannabis, but growing something that experienced consumers will purchase a second time requires a great deal of skill and luck.
Unlike some of its peers that prefer an open floor plan, Organigram expects to have a whopping 144 different grow rooms in operation. With 144 separate rooms, the company had to assemble a database, called OrganiGrow, to track everything that happens from seed to harvest in each room. Constantly experimenting then repeating conditions that produce more of a better product is a big reason the company's one of Canada's highest-rated producers.
While Organigram's peers claim to do the same, their results suggest differently. For example, Aurora Cannabis (ACB 5.48%) reported an average yield of 35 to 65 grams per plant, which is awful. Organigram's the only company I've seen report more than 100 grams per plant on average, and the company hasn't reported less than 120 grams per plant in over a year.
A buy now?
Bigger doesn't necessarily mean better quality, but it's a pretty good indicator. Around 120 grams per plant isn't worth writing home about if you're an experienced hobbyist working with a few plants at a time, but it's still miles ahead of any major growing operation the company's competing with right now.
It's probably a good idea to wait until after the next round of marijuana earnings reports, but there's a good chance Organigram stock could double your money or better in the long run.