Organigram is a junk stock, this fund manager says

If you’re looking to invest in the cannabis sector, you’d best stay clear of Organigram (Organigram Stock Quote, Chart, News, Analysts. Financials TSX:OGI). So says Brian Madden of Goodreid Investment Counsel, who thinks shareholders should be selling this junk name of the Canadian cannabis space.

Moncton, New Brunswick’s Organigram made headlines this week when it announced that CEO Greg Engel would be stepping down from his role effectively immediately. Engel will work as a special advisor to the Board until a new head is found, with Organigram Chairman Peter Amirault taking up the reins in the meantime.

“Greg has brought innovative leadership as the company created new structures around operations and increased capacity to serve the growing marketplace, while ensuring our successful launch into the adult recreational cannabis space and bringing leading innovative new platforms and edible products to the marketplace,” said Geoff Machum, appointed Monday as an independent lead director on Organigram’s board, in a May 3 press release.

The news comes just weeks after Organigram announced a major investment from tobacco giant British American Tobacco (BAT) to the tune of $221 million for a 19.9-per-cent stake in the company. A number of Canada’s top cannabis companies have teamed up in recent years with either a tobacco, alcohol or consumer products company as a move towards upping their game in terms of commercializing products both domestically and on the international front.

The cannabis sector had been flying high up until early February, riding a wave of interest over the fourth quarter 2020 and into the new year, but the space has cooled off since. That sector-wide movement has hit Organigram, too, which hit a high of $7.62 after the BAT announcement but has been in the low-$3.00 range of late.

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But investors shouldn’t take the pullback as an opportunity to climb aboard Organigram, says Madden, who thinks the CEO departure is a sign of deeper dysfunction.

“We don’t like the stock. I’m going to use a four letter word to describe it: junk. There are lots of junk marijuana producers out there and this is one of them,” said Madden, senior vice president at Goodreid, who spoke on BNN Bloomberg on Wednesday.

“We think it’s a bit disconcerting that a CEO who’s not particularly old stepped down and there was no successor. That’s a governance and leadership failing. Companies should be grooming successors to the CEO,” he said.

Organigram has been expanding its rec cannabis lineup this year, coming out in April with two new dried flower strains in its Edison Cannabis line of products, including high-THC GMO Cookies and the citrus diesel MAC-1 hybrid strain.

COVID-19-related staffing reductions have hit Organigram over the past year, impacting the company’s production and revenue. In its latest quarter, OGI missed analysts’ consensus estimates, coming in with $14.6 million in revenue for the company’s fiscal second quarter 2021 and a net income loss of $66.4 million. Analysts had been calling for $19.3 million in revenue and a loss of $10.1 million. The fiscal 2021 Q2 numbers compared with last year’s Q2 at $27.3 million in revenue and a net loss of $6.8 million.

“Nearer term, we are currently tracking to generate higher revenue in Q3 2021 as our new product portfolio continues to gain traction and we become better staffed to fulfill demand,” said Engel in Organigram’s second quarter 2021 press release on April 13.

“Our recent acquisition of The Edibles and Infusions Corporation positions us to generate revenue from the largest single category of edibles, soft chews or gummies,” he said. “Longer term, we are extremely excited about developing innovative and appealing products to consumers in collaboration with BAT. All of this is made possible and supported by strong liquidity and a balance sheet that is largely debt-free.”

But Madden says investors would be better off looking at cannabis companies in the United States, which is seeing more and more states legalizing marijuana along with optimism about movement at the federal level on cannabis.

“Structurally, our beef with Organigram is that it’s got roots in medicinal cannabis which many if not most of the marijuana producers do but they’re very, very early in their journey towards expanding into recreational marijuana, which, of course, is a much bigger market opportunity,” Madden said.

“And then even more troubling is the fact that Organigram is operating only in Canada, where our preference is for the US multi-state operators,” Madden said. “It will come as a surprise to no one that the US market opportunity the total addressable market there is an order of magnitude bigger than in Canada, so there’s no shortage of ways to invest in the space and it has changed from a market where a rising tide lifted all boats — and in some cases sank all boats — when sentiment turned to a stock-pickers market, which is good.”

“But [Organigram] is not a great stock, the valuation is not good, the strategy and positioning is not good and the leadership vacuum is really not good, so don’t buy and sell if you own it,” he said.

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