The month of September has historically produced the lowest return of any month in the year for the S&P 500, resulting in an average loss of 0.5%. And although a historically slow month during what's been a volatile broader market doesn't necessarily mean investors should avoid the largest companies tracked by the index, it does offer up an opportunity to evaluate where new investment money is going.
One area to look at is the burgeoning cannabis market. Organigram (OGI 3.15%) is the No. 2 licensed producer in Canada by market share, specializing in flower, edibles, and concentrates. The company has seen its stock hit an all-time low this year, but is experiencing momentum from four consecutive quarters of revenue growth. Is the time right to harvest some shares for your portfolio?
Market share growth is a good sign
Organigram's market share has grown over the past year, from 7% to 8.5%. CEO Beena Goldenberg attributes the company's growth to selling high-quality products at reasonable prices, with growth occurring organically and via international expansion through co-branding partnerships such as the one it has with Canndoc in Israel.
This allows the company sales exposure outside of Canada while also spreading its name in association with high-quality products. In addition to Israel, the company has partnerships in Australia, and is keeping an eye on the U.S. market for a potential entry point.
Along with growing revenue, the company is experiencing facility growth as well. In July it completed 29 new grow rooms at its facilities. What's helping it finance expansion is a $150 million (C$220 million) investment from British American Tobacco (BAT) in 2021 in exchange for a 20% stake in Organigram. But as much as it helped Organigram with financial footing and cash reserves for potential future growth, it could also be an area for investors to keep an eye on.
Support from big tobacco could lead to big markets
As part of the relationship, Organigram works with BAT on the development of products, which gives BAT a more detailed inside look at the company. It also opens the door to a possible larger position taken by BAT at a later time, or an expanded partnership, which could benefit investors. BAT sells its products in the U.S. and Europe, which could provide immediate inroads for Organigram to much bigger markets. The U.S. cannabis market is expected to value at $40 billion by 2030.
Entry into the U.S. market will not come without tough competition, though, from the likes of major multistate operators like Green Thumb, Curaleaf, and Trulieve. And that's if Organigram's quality products can find their way through the Canadian market competition. Organigram's $38 million in third-quarter revenue currently ranks eighth in New Cannabis Ventures' list of top Canadian cannabis companies by quarterly revenue. By comparison, the top dog in the Canadian market -- by quarterly revenue -- is Canopy Growth at $110 million.
Further headwinds facing many cannabis companies are a broader market decline, overloaded inventories due to slower than anticipated sales in the Canadian cannabis market, and the jockeying of companies to prove their worth to investors and consumers.
A buy-low opportunity with minimal risk
But Organigram has a plan to deal with that competition. It's using data insight from consumers to release new products that meet consumers' needs, such as new edibles and vapes, while fitting to Organigram's quality brand. The company is also ramping up production from its new grow rooms in order to meet rising demand. Greater emphasis on higher-margin products has led to a gross margin improvement during Q3 to 24%, from a negative 4% last year for the same quarter.
Investors with a long-term investment strategy who get in on Organigram now are looking at consistently growing revenue, a cash surplus, and a stock price that is bouncing off an all-time low. As the Canadian market evolves, it should open up more opportunities for quality producers such as Organigram to benefit, making now a good time for investors to consider a buy-low opportunity.