The idea of buying any marijuana stock right now might seem less than appetizing. That's because over the past seven months, most brand-name pot stocks have lost half, or more, of their value.
Despite being a fast-growing industry, not even cannabis is without its growing pains. To our north, supply issues have slowed the uptake of legal cannabis purchases. Meanwhile, in recreationally legal U.S. states, high tax rates have constrained legal sales and given new life to black-market producers. The result has been generally weaker-than-expected operating results across the board and the official bursting of the cannabis bubble.
However, as we turn the calendar to November, one marijuana stock stands head and shoulders above its peers as being a particularly intriguing value. While most Canadian pot stocks are better off left on the shelf and given time to mature at this point, OrganiGram Holdings (OGI 4.35%) may very well be worth buying right now.
Here's why OrganiGram has stumbled of late
But before I dive into the numerous reasons OrganiGram should have a spot in your portfolio, let's recount some of the catalysts responsible for sending its share price down more than 50% since it debuted on the Nasdaq exchange a little over five months ago.
Arguably the biggest concrete weight on OrganiGram's share price has been the persistent shortage of cannabis products since day one of adult-use weed legalization on Oct. 17, 2018. Regulatory agency Health Canada has been contending with an absurdly large number of cultivation and sales license applications, and it simply hasn't been able to review and approve these applications in a timely manner.
To build on these supply woes, select provinces have been slow to license or approve the rollout of physical dispensaries. Ontario, a province with a population of 14.5 million, has only 24 open marijuana dispensaries. With so few legal purchasing options, consumers have turned to the black market for their pot needs. OrganiGram, like its peers, has fallen victim to these regulatory and procedural hurdles.
It also shouldn't be overlooked that Health Canada, which had been targeting an October 2019 launch of marijuana derivative products (e.g., edibles, vapes, infused beverages, topicals, and concentrates), now expects these products to first appear in dispensaries by mid-December. This later-than-expected launch, coupled with the fact that supply problems are going to impact these higher-margin products, has done a number on the entire Canadian pot-growing industry.
Beyond supply problems, OrganiGram has also been upping its spending in preparation for the launch of derivative products. Higher expensing has meant a continuation of the net losses that investors have become unfortunately accustomed to with Canadian marijuana stocks. With marijuana legal in a number of North American markets, investors want to see tangible results before they push pot stock valuations higher again.
OrganiGram has a clear-cut competitive edge over other major growers
Now that you have a better idea why OrganiGram's stock has struggled since the latter part of May, allow me to list the numerous competitive advantages this grower brings to the table that should have investors reaching for the buy button in their brokerage account.
Let's start with OrganiGram's most front-and-center advantage: its location. It's the only major grower -- I'm defining a "major" grower as any company capable of at least 100,000 kilos of peak annual output -- located in an eastern Canadian province. Being based in New Brunswick, OrganiGram has geographic and branding advantages when it comes to supplying these eastern provinces, such as its home market of New Brunswick, as well as Nova Scotia, Prince Edward Island, and Newfoundland and Labrador. Though these are less-populated regions of Canada than, say, Ontario, surveys have shown that marijuana-use rates among adults in eastern provinces are all higher than the national average.
That brings me to the next point: OrganiGram is one of four growers to have a supply agreement in place with every single Canadian province. And, might I add, CannTrust is also one of those four growers, and its cultivation and sales licenses are suspended at the moment by Health Canada. This means OrganiGram is among rarified company in its ability to reach all of Canada's markets.
Next, the company is focused on growing marijuana at just one facility: the Moncton, New Brunswick, grow site. Whereas many of OrganiGram's peers have been spending exorbitant amounts of money to boost capacity and acquire other businesses, everything for OrganiGram is centralized in its one cultivation and processing facility. This makes cutting costs and improving operating efficiency considerably easier for OrganiGram than any other major Canadian grower.
Speaking of efficiency, you'd struggle to find Canadian cannabis growers that offer a higher yield per square foot than OrganiGram. Thanks to the company's three-tiered growing system, management has consistently guided for 113,000 kilos of annual output when fully operational. Given that OrganiGram is working with around 490,000 square feet of grow space, this works out to about 230 grams of yield per square foot. For comparison, most of the company's major peers are likely producing between 75 grams per square foot and 125 grams per square foot when fully operational. This is just another way that OrganiGram is maximizing its output and minimizing its costs.
This is also a company with a laser focus on the high-margin derivatives market. It's developed a proprietary nano-emulsification formulation that speeds up the process by which the effect of cannabinoids take effect in beverages. It'll first be introduced in powder form, allowing consumers to add the product to the beverage of their choosing, although the company is looking for an established beverage partner to incorporate this formulation into a line of infused beverages. Further, OrganiGram spent 15 million Canadian dollars on a line of fully automated equipment capable of producing 4 million kilos of infused chocolates per year.
Last, but not least, OrganiGram is pretty much the only major grower to thus far produce a no-nonsense quarterly profit. If you remove all one-time costs and benefits, including fair-value adjustments on biological assets, OrganiGram generated CA$24.75 million in net sales in the fiscal third quarter, a $12.28 million gross margin, and had operating expenses of CA$11.11 million. That leaves an operating profit of CA$1.17 million. Sure, that's pretty menial, all things considered, but it demonstrates just how important these competitive advantages will be for OrganiGram's bottom line.
I recently suggested that OrganiGram would be the first Canadian pot stock to generate a recurring operating profit, and it looks well on its way to meeting that prognostication. That's what makes it my top marijuana stock to buy in November.