Stocks to sell

Why Organigram Stock Is Likely to Fall Going Forward

Marijuana stocks have cooled off in recent weeks. Organigram Holdings (NASDAQ:OGI) stock was once a “can’t lose” bet, but it has turned out to be a volatile one with plenty of risk.

Marijuana plants growing in a greenhouse.

Source: Shutterstock

Let’s examine the company-specific and sector-specific concerns driving this volatility.

Lack of U.S. Presence Is a Real Issue for OGI Stock

The victory of President Joe Biden coupled with a flipped Senate have reignited expectations that federal cannabis legalization is on the horizon.

Retail investors have begun to pile into this once-crowded trade again. This time, small-cap stocks like Organigram are being targeted as potential home runs. As investors swing for the fences, it’s important to keep things in perspective; Organigram is still a Canadian cannabis player, with little in the way of U.S. market penetration right now.

Unlike U.S. multi-state operators like Curaleaf (OTC:CURLF), a top pick of mine for long-term cannabis investors, Organigram will be on the sidelines in the U.S. until the American federal government legalizes marijuana.

As a result, I’m less inclined to believe the recent stock rallies by small Canadian players are going to turn out to be sustainable over the long-term. Rather, I expect continued downside pressure as the market validates the true global opportunity of each individual cannabis player.

Organigram Won’t Be Profitable for Some Time

Organigram’s recent earnings release wasn’t anything to write home about. Its net revenue declined by 23%, and its gross margins imploded. Additionally, the company posted a massive loss, amid turnaround efforts to get itself moving in the right direction.

Indeed, the company has been in cost-cutting mode recently. While this has resulted in reduced cash burn for the company, its  production bottlenecks have prevented it from delivering the top-line growth that many investors have looked for from marijuana stocks like Organigram.

The Canadian market remains oversupplied, so the company’s production cuts are prudent. However, growth investors still want to see Organigram’s top-line numbers improve over time. In this regard, the firm looks like it might be leaving opportunity on the table.

In November, Organigram raised $60 million by issuing stock at $1.85 per share. This has led to speculation that more stock sales could be on the horizon, given the fact the company’s share price is hovering around $4.50 per share now. Regardless, Organigram’s balance sheet issues appear to have stabilized for the time being; that’s one reason behind the company’s recent stock price spike.

The Risk-Off Sentiment Is Likely to Continue

That said, high-growth risk assets, such as various small-cap cannabis plays, have been hit hard over the past month. Risk-off sentiment appears to be taking hold in the market, dragging down some marijuana stocks and making others, including OGI stock, very volatile.

In recent weeks, bond yields have been on the rise. Additionally, it appears the Federal Reserve may be less inclined to step in and manage the longer end of the yield curve. That has led to concerns that high-growth stocks in the cannabis sector and beyond could continue to be very volatile.

The Bottom Line on OGI Stock

My take on OGI stock right now is that it should be avoided.

I think the long-term implications of federal legalization will be hugely positive. However, I believe that the lion’s share of the benefit will go to those companies with existing operations in the U.S.

Companies like Organigram will have a difficult time expanding existing operations to meet the increased demand. This risk has become much higher given the job cuts and cost-cutting measures undertaken by Organigram’s management team.

Additionally, looking under the hood, Organigram’s financials are simply disturbing to any investor with a conservative, fundamentals-oriented outlook.

There are better options in the multi-state operators space. I’d encourage investors to avoid getting caught up in the lottery ticket mania right now and focus on fundamentals first.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.