The past few months have been golden for OrganiGram (NASDAQ:OGI) stock. First, the Canada-based pot play soared in January on the “blue wave” U.S. Senate election results.
Then, “meme stock madness” gave it another turbocharge. After that, in March, another development gave it a brief boost.
I’m talking about the partnership deal with British American Tobacco (NYSE:BTI). This deal gives it not just a $177 million cash infusion. With a deep-pocketed strategic partner, it has more of a chance of becoming a leader in this space.
In short, the BTI deal is good news for OrganiGram. But it won’t be what moves the needle going forward. For that, it will need further progress on U.S. marijuana legalization. U.S. states from coast to coast are legalizing marijuana. Yet, it remains a controlled substance on the federal level. Canada-based operators need these lifted to enter the American market.
As of late, there’s been little progress with legalization, even as the public’s views on it become favorable. With continued inaction, shares could continue to trade sideways. This may put off traders looking for fast gains. But for investors with more patience, this “legalization lottery ticket” could be worth the wait. Sure, it’s still a long shot. Yet, risk/return is firmly in your favor.
Partnership News and Legalization Delays
OrganiGram’s pop on March 11, following the BTI partnership announcement, was more than justified. The cash bolsters its balance sheet. The Product Development Collaboration aspect to the deal gives it a leg up in developing high-margin cannabis products.
And cannabis products, not weed itself, is where companies like this one will finally find profitability. The sale of weed itself is a low-margin, commodity business. But branded products offer greater opportunity to become cash cows. Yet even if it starts making progress with new Cannabis 2.0-type products, don’t expect any more sudden upward moves anytime soon.
In recent weeks, hopes of a fully open American pot market have faded. The U.S. Democratic party, more favorable to pot law reform, controls both the White House and Congress. But even within the party, there’s division with regards to the extent of future changes.
Senate Majority Leader Chuck Schumer keeps pressing for a full lifting of restrictions. But so far, President Joe Biden wants to only decriminalize, not legalize, pot. Biden’s position could soften over time. Trends still point in the direction of reforms. It just may take longer than expected for things to fully go in this industry’s favor.
Delays do not destroy the bull case for this stock. At least, not for investors looking for more than a quick trade.
OGI Stock Is a Solid Speculative Pot Play
Pot legalization gridlock points to sideways price action for OrganiGram. This may be a deal breaker for short-term traders, but not for investors with a longer time horizon. In fact, among the more speculative pot names, this may be your best option.
The valuation of OGI stock looks reasonable relative to peers. Shares today trade for around 13.9x estimated fiscal 2021 (fiscal year ending August 2021) sales. Compare that to Sundial Growers, which sports a forward price-sales ratio of 31.9x.
OrganiGram may still be unprofitable, but it currently has a $103.1 million cash position, not including the cash from BTI. That’s more than enough to survive and thrive in the coming years as it scales up to profitability. Larger names like Canopy may have stronger balance sheets. Not to mention, more potential to dominate the U.S. market.
Yet, it’s smaller, riskier names like this one that will produce outsized returns if the best-case scenario plays out. In other words, they’re “legalization lottery tickets,” a term I coined to describe Sundial. But OGI stock looks to be the one with better odds.
Expect Sideways Trading for Now
Once the BTI deal closes, also-ran OrganiGram will be in a stronger place. Just don’t expect this alone to fuel another rally. Instead, future big price moves continue to hinge on legalization. Any sort of progress could fuel another upwards move. If pot becomes fully legal, another triple-digit percentage move isn’t out of the question.
Until then, expect shares to tread water.
Sideways price action may mean OGI stock no longer makes it a great short-term trade. But it remains a solid long-shot pot play for long-term minded investors.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.