Avoid Organigram stock, says Jason Mann

So says Jason Mann of Edgehill Partners who warns that with the pot business having yet to find its footing there could be more downside to the name.

Moncton, New Brunswick-based Organigram has come across as an interesting alternative to the licensed producer heavyweights on the Canadian marijuana scene such as Canopy Growth Corp and Aurora Cannabis. And with its attractive production costs and nationwide chain of supply deals, what’s not to like about a company that should take a big bite out of the Canadian market once its flower and edibles products find their groove?

A lot, says Mann, chief investment officer at Edgehill Partners.

“Most of these stocks are off 50 to 80 per cent year-to-date, and Organigram is no different,” says Mann, in conversation with BNN Bloomberg on Monday.

“The challenge again is valuation. I think that the legal cannabis market has proven to be a bit of a bust from a sales perspective in terms of how quickly they could scale up, the retail stores haven’t come online as fast as people would have liked and the margins just aren’t there. So, you’ve had that combination of very expensive stocks which start missing on earnings or the earnings just don’t materialize,” he says.

“OGI has fallen into that same trap,” says Mann.

Organigram started off 2019 like gangbusters, climbing 133 per cent between the start of January and mid-May. That’s when the things turned sour across the cannabis sector, as the first few quarters of legalized weed came rolling in with companies showing less revenue and in many cases still-significant losses. The grim financial news was coupled with scandal from one of Canada’s more reputable pot-co’s, CannTrust Holdings, which was found growing cannabis in unlicensed greenhouses.

The tide turned on cannabis virtually across the board, including on Organigram, which lost a whopping 68 per cent of its value between May and October.

Organigram’s last quarterly financials came in late July where the company’s third quarter missed analysts’ expectations on revenue at $24.8 million, up from $3.4 million from the previous year but lower than the previous quarter’s $26.9 million.

Yet Organigram still has a number of fans, with some pointing to the arrival of the edibles market as a likely boost for the company.

“[Organigram] stands out from Canadian LP peers as one of the few to report four consecutive EBITDA positive quarters and to have more than 1.5 years of cash on its balance sheet,” said Paradigm Capital analyst Corey Hammill in an update to clients on October 17.

“The industry has changed, and while others focus on survival, Organigram is prepared to take the next step and carry its traditional market leadership into Cannabis 2.0,” he writes.

Mann says that he wouldn’t recommend buying OGI, even with its depressed value, saying that there are still no concrete measures to value the cannabis stocks.

“It’s fine to be in speculative investments but when they’re really overpriced ultimately this is the result is that these stocks correct a lot,” Mann said.