To say that 2019 was a letdown for marijuana stock investors would be a massive understatement. Last year was supposed to be when cannabis stocks put the pieces of the puzzle together and became profitable as an industry. However, a myriad of issues, including supply problems in Canada and high tax rates in select U.S. states, gave further rise to an already resilient black market. As a result, most marijuana stocks were clobbered.
The thing is, with cannabis stocks going up in smoke, some investors now believe that they might be an intriguing value. One such name that's popped up on the value radar is popular marijuana stock OrganiGram Holdings (OGI -1.03%). It wound up shedding 31% of its value in 2019, and declined roughly 70% from its high, set in May.
But is this significant decline an opportunity for investors to pick up this pot stock on the cheap?
As you're about to see, I believe it is.
Image source: Getty Images.
OrganiGram had a rough 2019
Before diving into the various reasons OrganiGram should have a much better 2020, let's look at some of the factors that played a role in its abysmal performance last year.
To begin with, there have been steady supply issues since day one of recreational cannabis sales in Canada on Oct. 17, 2018. These supply issues have been a result of Health Canada struggling to approve cultivation and sales licenses in a timely manner and delaying the launch of derivatives (e.g., edibles, vapes, and topicals) until December. And there was Ontario, the largest province by population, slow-stepping the rollout of physical dispensaries. For growers like OrganiGram, all of this has meant limited channels with which to get product in front of consumers, and therefore a strong black-market presence.
On a more company-specific basis, we've seen OrganiGram's operating losses creep up as the company has prepared for the launch of derivatives (commonly referred to as Cannabis 2.0). It wound up initiating what it called a phase 5 buildout of its Moncton facility in New Brunswick to add more square footage for processing high-margin derivatives. These added costs have weighed on the bottom line at a time when Wall Street is become hypercritical of income statements with pot stocks.
Furthermore, OrganiGram also recently announced that it would halt construction on the final phase of its Moncton facility, which is designed to take peak production capacity from 89,000 kilos on an annual run-rate basis to 113,000 kilos. The move is being made to account for the numerous supply issues discussed above. But the reality of these cuts also means that the company and its flagship facility aren't operating at peak scale.
Now that you've had the walk-through behind OrganiGram's problems last year, here are an assortment of reasons that the grass will, indeed, be greener in 2020.
Image source: Getty Images.
Why 2020 could be a lot better
To start, consider why OrganiGram is unique as a major grower (and by "major grower," I'm referring to any grower with at least 100,000 kilos of annual output potential). For instance, it's the only major grower located in an Atlantic province. Although these provinces have smaller populations than, say, Ontario or Quebec, cannabis-use rates among adults in these regions are actually higher than the national average. This puts OrganiGram in an enviable position in these provinces. It's also worth mentioning that it is one of just five cannabis growers to have supply deals in every Canadian province.
To build on the above, OrganiGram's entire cannabis output is derived from its lone Moncton facility. This is rare, with major growers typically having anywhere from three to 15 cultivation sites. Having just one campus reduces OrganiGram's supply chain costs, as well as making it far more nimble than its peers when it comes to adjusting expenses or output to better align with demand. Being able to focus its efforts on one facility is another reason OrganiGram's production efficiency should be near the top of the industry.
The current year should also witness a significant uptick in derivative sales, which, as noted, were launched last month. OrganiGram spent 15 million Canadian dollars ($11.5 million) on fully automated equipment capable of producing 4 million kilos of infused chocolates per year. It's also one of four chosen partners of Pax Labs for its Era vaping device, and has developed a proprietary nano-emulsification technology that speeds up the process by which cannabinoids take effect. It'll first be launched as a powder that can be added to beverages in the first half of 2020. In short, OrganiGram's higher-quality sales are about to pick up.
Next, it's important to recognize that this company's income statement is a lot healthier than many of its peers. Even though OrganiGram's operating losses moved notably higher in the fiscal fourth quarter, this is also the only Canadian grower to have generated a no-nonsense operating profit during any quarter. If all one-time benefits and costs, including fair-value adjustments, are removed from the equation, OrganiGram delivered a CA$1.17 million operating profit in the fiscal third quarter. It's the only Canadian pot grower that's shown the ability to be profitable without one-time bells and whistles.
Image source: Getty Images.
This still needs to happen for OrganiGram to have a good year
Of course, none of these competitive advantages will mean that much if Canadian growers don't get help from regulators in 2020.
Ontario, for example, announced that it would be getting rid of the lottery system that had been used to award retail licenses. The initial round of awards only led to 24 dispensaries being open by the one-year anniversary of adult-use sales, working out to one retail location per 604,000 people. Ontario now plans to process applications in a more traditional manner, with regulators aiming to approve about 20 licenses per month. By year's end, Ontario will, hopefully, see a tenfold increase in the number of open retail locations.
It's also important for OrganiGram to get off to a solid start in derivative sales. Part of this has to do with provincial regulators approving retail licenses, as well as OrganiGram having its production infrastructure in place to meet demand.
While nothing is a given with pot stocks, as 2019 has shown, OrganiGram looks better positioned to succeed than many of its peers in 2020.
