OrganiGram Holdings (OGI 1.77%) shares are down more than 25% so far in 2019. And the situation is even worse than that decline reflects. OrganiGram got off to a great start this year, with its share price more than doubling. The stock is nearly 70% off its high set in May.
Will OrganiGram continue to flounder in the new year, or is a rebound in store? I suspect the latter. Here are three reasons OrganiGram should be able to bounce back big time in 2020.
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1. Improving retail environment in Canada
The biggest headwind for OrganiGram right now is the lack of an adequate retail infrastructure for the Canadian adult-use recreational marijuana market. This issue is especially problematic in Ontario, the most heavily populated province in the country.
But the retail environment should improve significantly in 2020. The number of stores in Ontario could triple within the next few months. Quebec plans to double the number of retail cannabis stores. Alberta is in the best shape of all the provinces, and it could also increase the number of stores next year.
Even with the next wave of store openings in Ontario, there still won't be enough to get the province to where it should be. However, the province will likely issue even more retail licenses in 2020. The main thing is that the situation will improve dramatically for the Canadian cannabis industry. I think OrganiGram is well positioned to benefit from the improving retail environment.
2. Momentum for cannabis derivatives products
The increase in the number of retail stores in Canada plays right into another growth driver for OrganiGram in 2020 -- the new cannabis derivatives market. While this market technically opened on Oct. 17, 2019, Health Canada requires a 60-day notice before launching new products. As a result, OrganiGram and its peers won't begin shipping cannabis derivative products until next week.
OrganiGram apppears to have a solid strategy for the new market. The company is focusing at first on edibles and vapes, both of which should be winning categories. OrganiGram CEO Greg Engel mentioned in the company's Q4 conference call last month that its chocolate product (that wasn't cannabis-infused yet) had the highest likeability score compared to two of Canada's top-selling chocolates. That could bode well for OrganiGram's cannabis-infused chocolates. The company also seems to have its based covered with vape products through its partnerships with PAX Labs and Feather and its own Trailblazer value line of vapes.
OrganiGram is taking a different approach than some of its rivals for cannabis-infused beverages. The company plans to launch powdered products that allow consumers to add cannabinoids to any beverage. Importantly, OrganiGram won't incur the costs of bottling or canning -- and its transportation costs will be a lot lower than they would be for shipping beverages. This "cannabis Kool-Aid" concept just might be a big success story for OrganiGram.
3. Rising gross margin
Yes, OrganiGram's gross margin in Q4 was bad. However, CFO Paolo De Luca noted in the company's November conference call that the fourth quarter "had kind of a confluence of events that led to this kind of definitely lower gross margin than we would ever want" with some product returns, the retail headwinds, and some higher cultivation costs.
While these problems might not completely disappear in 2020, they shouldn't be nearly as troublesome as they were in Q4. De Luca said that he thinks the fourth quarter was "an anomaly." That's a pretty good assessment, in my view.
OrganiGram claims a higher average selling price than many of its peers thanks to the quality of its products. At the same time, its cost of cultivation is lower than most of the industry and its operational spending is definitely more frugal than quite a few of its big rivals. I think these factors combined with the improving retail situation in Canada and the momentum for the cannabis derivatives market will be -- to paraphrase De Luca's Q4 comments -- a confluence of positive developments for the company in 2020 that lead to rising margins.
What could go wrong?
What could go wrong in 2020 for OrganiGram? The top potential hurdles are basically the reverse of the reasons outlined earlier for why the stock should rebound next year.
While Ontario and other provinces say they're committed to allowing more retail stores to open, they're still bureaucracies that could make something that should be easy extremely difficult. Cannabis derivative products might not sell nearly as well as anyone predicts. And despite OrganiGram's take that Q4 was an anomaly, the company could still have more product returns in the new year that weigh on its margins.
At times, it seems like Murphy's Law probably needs a corollary for marijuana stocks. However, I really do think 2020 will be a better year than 2019 has been for OrganiGram. Look for a major rebound next year.
