When Canada became the first G7 member state to legalize recreational marijuana, investors (including yours truly) were excited about the remarkable development. Later, when the U.S. legalized cannabidiol (CBD) – essentially weed without the high – via the Agriculture Improvement Act of 2018, green proponents again had a reason for their bullishness. However, the sentiment just didn’t pan out for companies like OrganiGram (NASDAQ:OGI). On a year-to-date basis, OGI stock is down a staggering 56%.
Fundamentally, the justification for speculating on cannabis firms was the radical paradigm shift. Basically, we’re talking about a black market that is untaxable into a legal one that is taxable.
Yes, moral arguments have been a sticking point in politics. But here in the U.S., two-thirds of Americans support marijuana legalization, according to the Pew Research Center.
Given that the Canadians are a bit more progressive than Americans, this should bode well for OGI stock, considering the home-field advantage. Clearly, that’s not how things panned out.
However, that doesn’t mean that all hope is lost. For instance, InvestorPlace contributor David Moadel wrote earlier this summer that OrganiGram isn’t giving up on Cannabis 2.0, the term for Canada legalizing cannabis derivative products like edibles and vaporizers. As consumer sentiment gradually returns to normal, OGI stock could see bounce-back potential.
Also, keep in mind that the novel coronavirus pandemic has been a trying time for everyone. For the first time, a major crisis is not localized to a specific area. We’re all feeling the pain in one way or another. To help relieve mental tensions, cannabis products could provide a ready-made solution.
Indeed, the pandemic could be one of the biggest organic marketing opportunities for OrganiGram.
OGI Stock Has Dissociated from the Leaders
Although some outside factors provide encouragement, the pandemic also leaves behind some headwinds. For instance, it’s well within the realm of possibility that we could have an economic slowdown in the U.S. And cynically, if we go down, there’s a good chance we take the Canadians down with us.
If that’s the case, the narrative for black market weed will become even more viable than it is now. Further, that law enforcement is inundated with bigger problems suggests the incentive for illegal weed has ticked higher. Obviously, that would be a net negative for OGI stock.
Beyond that, it’s important for OrganiGram, as a smaller player in the sector, to keep up with cannabis’ top dogs, such as Canopy Growth (NYSE:CGC). So far, it’s doing exactly that on the downside. For example, between May 6, 2019 to June 10, 2020, OGI stock registered a 96% correlation coefficient with rival CGC’s pricing action that occurred between April 12, 2019 to May 19, 2020.
However, OGI’s price action between June 11 to Sept. 22 and CGC’s price action between May 20 to Aug. 31 have a correlation coefficient of 31.4%, which is statistically insignificant. In other words, OGI has disassociated from CGC, with the latter moving higher while the former struggles.
Worryingly, the price action for OGI stock is much more similar to embattled industrial firm General Electric (NYSE:GE). Between Dec. 12, 2016 to Jan. 19, 2018, GE’s price action shared an 83% correlation with OGI shares in its first time interval mentioned above.
But here’s the kicker: between Jan. 22, 2018 to May 3, 2018, GE’s price action recorded a still statistically significant 73% correlation with OGI shares in its second interval.
OrganiGram didn’t just disassociate from its sector leaders, it’s now technically associated with another industry’s laggard.
A Comeback Is Possible But Note the Risks
On May 3, 2018, the GE stock price was $13.05. Today, shares are trading hands at $6.25. Therefore, if the correlation continues for OrganiGram, OGI is staring at more pain down the road.
Of course, this isn’t to say that OGI stock is guaranteed to fail. Far from it. But right now, market sentiment does not favor OrganiGram. market sentiment does not favor OrganiGram If we assume that the markets represent collective demand (and assuming that this demand is rational), investors clearly don’t like this company’s risk-reward profile.
That could change and quite dramatically, depending on which way the coronavirus and economic winds blow. However, OGI stock is something that should be reserved for contrarian traders that can stomach the risk. If you want a more reliable cannabis play, you’re better off going with an obvious name like Canopy Growth.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.