You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
This past week, one of our favorite cannabis stocks, Organigram (NASDAQ: OGI) (TSX: OGI), reverse-split its stock in order to maintain its NASDAQ listing. We have written about it here several times, most recently in mid-June when we suggested it is a much smarter option for cannabis investors than Canopy Growth. Since then, Organigram has dropped, but not by nearly as much as Canopy Growth.
We have seen a lot of comments from investors regarding the move by Organigram as being a reason to sell or to not buy. We disagree, but we understand where they are coming from. Typically, when a cannabis stock reverse splits, it declines in price subsequently. This is especially true for OTC stocks, but Organigram is a NASDAQ-listed stock. The reason it can be such a negative sign for OTC stocks is that it can signal capital-raising ahead.
Observers of cannabis stocks would see, though, that NASDAQ-listed stocks that have gone through the process of reverse-splitting have been crushed. We believe that it’s important to remember that we are in a big bear market, so it can be easy to spot negative trends. So, the first reason investors are making a mistake with respect to Organigram by assuming the reverse-split is a harbinger of lower prices is that they are misattributing the cause of the post-split pullbacks.
Another part of the poor logic is because so many reverse-split companies have, in fact, sold stock right after the split. Just this week, 22nd Century Group (NASDAQ: XXII) reverse-split its stock and then sold shares privately. pushing the stock to a 10-year low. There are several examples of this type of activity, but investors should understand that Organigram is extremely unlikely to sell stock. The company ended its fiscal Q2 (2/28) with minimal debt and over C$71 million in cash and investments. The company had negative operating cash flow in Q2 and in the first half of the year, but the CFO stated that management expects the company to be generating free cash flow (operating cash flow in excess of capital expenditures) by the end of 2023.
We continue to view the stock as very inexpensive. Organigram trades at just 0.4X tangible book value, a huge discount to its net assets. The company has more cash than all of its liabilities. Compared to the analyst estimates for FY24, ending in a little over a year, the stock seems very attractive with an enterprise value at roughly 4 times its expected adjusted EBITDA. At 420 Investor, Organigram is the largest holding in the Beat the Global Cannabis Stock Index model portfolio.
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Alan & Joel