For a brief moment, I was a winner in calling the wild cannabis space. On Feb. 17 of this year, I stated that the rampant speculation in OrganiGram (NASDAQ:OGI) indicated that you should probably take profits. Yes, legal marijuana is a transformative market. However, even the most fundamentally sound investments can get overheated. Sure enough, between the publication price and March 10, OGI stock dropped more than 22%.
However, what followed was a series of trades that eventually blew up my call. On March 11, OGI stock soared 38% when British American Tobacco (NYSE:BTI) announced that it will invest $177 million in the underlying cannabis producer. Drilling into the details, Business Insider wrote the following:
The strategic investment will accelerate Organigram’s research and development and product pipeline development, with both companies entering into a product collaboration agreement. The two firms’ first collaborative product venture will be in the CBD [cannabidiol] space.
Both companies will contribute scientists, researchers, and product developers to the collaborative product initiative. The cash infusion into Organigram will also strengthen its balance sheet and put the company in a better position to compete in US markets.
On paper, the partnership makes sense. As the Pew Research Center indicated, two-thirds of Americans support marijuana legalization. That was back in November 2019. I’m almost certain the approval rate has gone up since then.
Even if it remained static, the CBD sector is compelling. As you may know, CBD is basically cannabis without the tetrahydrocannabinol that gives marijuana its signature high. I understand that there are nuances involved. But the broader point is that CBD facilitates industry evangelization, which in theory benefits OGI stock.
Imagine trying to pass a joint to your grandma. That’s a much different proposition than giving her a CBD-infused granola bar or a tincture integrated with essential oils. There’s much to love about this deal and yet it’s not the end-all, be-all.
OGI Stock Still Can’t Get Rid of Its Risky Profile
Although British American Tobacco backing Organigram gives the relatively small cannabis player credibility, I think it pays to take a step back and see the bigger picture. If you’re dead-set on buying OGI stock, I’m not going to stop you, but hear me out for a second.
This isn’t the first time that a major company backed a cannabis firm. Remember that the hype train was talking up Canopy Growth (NASDAQ:CGC) and Cronos Group (NASDAQ:CRON) because of their blue-chip support. Sure, these shares initially enjoyed a spike in their valuation. But it wasn’t until recently that the cannabis industry is starting to look interesting again.
Of course, every situation is different. You can’t be a market bigot and assume that a few deals going sour in a particular sector is emblematic of every deal’s outcome in the future. Then again, the one headwind that has plagued the cannabis market is supply-demand imbalances; namely, too much supply and not enough demand.
To be fair, the narrative may be improving for OGI stock. For instance, the lockdowns and schedule disruptions associated with the novel coronavirus response have caused insomnia problems, also known as coronasomnia. Some evidence suggests that cannabis may help address this issue.
Plus, you have the overall stress associated with the pandemic. Stress has always caused many people to seek botanical therapies, not that I would know or anything.
As well, you have the biggest whammy of them all – President Joe Biden. During the campaign trail, he and running mate Kamala Harris pledged to decriminalize marijuana. While that stops just short of full legalization, the Democrats may push for it. After all, legalization leads to jobs.
Still, the challenge for OGI stock would remain the same: too much flipping competition. So we’d be back to talking about the same concerns for OrganiGram but at a higher scale.
Technical Charts Do Not Encourage
I think it’s a fair assumption that many cannabis investments trade in sympathy with each other. If so, this would appear problematic for OGI stock.
Take a good look at the trailing six-month price chart of Cronos. I don’t want to suggest anything but from early January to mid-March of this year, it seems CRON is printing a bearish head-and-shoulders pattern. A similar looking formation – though not as pronounced – appears to be in play for Canopy shares.
OGI stock has a different configuration. Nevertheless, I’m not comfortable with it as volume doesn’t appear to be confirming the rise in the equity unit’s market value. Combined with the fundamental questions that remain, I’m going to stay on the sidelines (again).
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.