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Why OrganiGram Holdings Shares Sank Today

What happened

Shares of OrganiGram Holdings (NASDAQ: OGI) were sinking 8.6% lower as of 3:25 p.m. EST on Wednesday after falling as much as 11% earlier in the day. Today's decline appears to be a continuation of the sell-off that began on Tuesday following the Canadian cannabis producer's disappointing preliminary fiscal 2019 fourth-quarter update.

While OrganiGram won't officially announce its Q4 results until Nov. 25, the company let the cat out of the bag early that its results won't be as good as expected. OrganiGram expects to report Q4 net revenue of around 16.3 million in Canadian dollars with negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Cannabis plants growing in a greenhouse

Image source: Getty Images.

So what

Although OrganiGram had given up all of the big gains that the stock delivered earlier in the year, it was outperforming all of the top Canadian marijuana stocks until this week. The company's disappointing Q4 sneak peek has soured investors' relative optimism about the stock, though.

The factors behind OrganiGram's lower-than-expected Q4 numbers were largely in line with what the rest of the industry has been talking about. OrganiGram attributed its weak performance to the sluggish expansion of retail stores in Canada, particularly in Ontario, and increased supply of cannabis.

In addition, the company said that product returns and price adjustments totaling around $3.7 million Canadian dollars weighed on its overall revenue in Q4. OrganiGram stated that these returns and price adjustments were primarily related to two slower-selling low-THC dried flower and THC oil products sold to the Ontario Cannabis Store.

But is this week's sell-off overdone? There's a good case to be made that it is. The Canadian retail environment and product-return issues should only be temporary. OrganiGram's long-term prospects aren't changed by its lackluster Q4 performance.

Now what

There's considerable uncertainty for the Canadian cannabis industry right now. However, there are also several positives that should boost OrganiGram's fortunes over the near term.

Increasingly more retail stores are opening in Ontario. The number of cannabis retail stores could triple relatively soon barring any unforeseen delays. The cannabis derivatives market swings into full gear in mid-December. OrganiGram is on track to launch several new products, including vape pens and cannabis-infused chocolate edibles with a cannabis powdered beverage product on the way, as well.

As these developments play out, don't be surprised if OrganiGram rebounds nicely in 2020.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends OrganiGram Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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