OGI Seeking Alpha articleOrganiGram Holdings: Why We Favor A Short-Term Trade Over A Long-Term Hold Feb. 12, 2021 1:55 AMOrganiGram Holdings Inc. (OGI) Summary The stock has looked really impressive in recent sessions. We look at a possible long-term play versus a short-term trade. Revenue expectations continue to increase as they did once more in the first quarter. OrganiGram Holdings (OGI) (Medical producer of Marijuana) came to our attention due to its strong spike in buying volume and associated implied volatility in recent sessions. When stock prices double in a very short space of time, it invariably means that market participants are very bullish on the company. The question then turns to how long this excessive bullishness will last. With respect to how we approach the markets, we are opportunity seekers. Whether this means investing in a company we like for years on end or trading a stock over a much shorter time-frame, the end goal always is to hunt down opportunity. Therefore, with respect to OGI concerning a potential long-term value play, we look at the stock's valuation, profitability and balance sheet. If all of these areas are basically in check, it drastically increases the possibility of sustained earnings growth. Due to elevated dilution however over the past few years, OrganiGram's valuation is definitely not cheap especially when we take the firm's sales into account. Valuation Multiple OGI Price To Earnings Currently Not Profitable Price To Book 5.6 Price To Sales 17.8 Price To Cash / Flow Currently Not Generating Operating Cash/Flow over a trailing average The lack of earnings and cash/flow at present is what would deter us from looking at OGI from a long-term perspective. The reason being is that if there is no change in the trend here with respect to profitability, the company internally will have to raise cash by either selling off assets, by increasing debt or by diluting the share-count even more. The balance sheet is more an area of strength for the company. Cash & Property, Plant & Equipment made up the lion's share of the company's assets ($473 million) at the end of the first quarter. Long-term debt increased pretty significantly in Q4 last year to surpass $104 million, but we witnessed a serious reduction in debt in the first quarter (now stands at $54 million). One has to take into account though the dilution (almost 40 million shares issued) in the most recent first quarter. When capital needs to be raised, it always brings a time element to proceedings. Management was upbeat on the recent earnings conference call with respect to generating positive operating cash/flow in two out of the last three quarters. The fundamentals are certainly there with respect to store openings. This is why we are seeing really aggressive top-line growth expectations both this year and in 2022. Investors have to decide whether the present cost of the company's sales (P/S of 17.8) are worth the risk with respect to the bullish forward-looking top-line expectations analysts have earmarked for this stock. From a short-term perspective, our outlook is definitely more bullish. As we can see from the daily chart below, shares have blasted above the resistance formed from the multi-month consolidation. Implied volatility has skyrocketed above 300%, which is well above its long-term mean. Therefore, any short-term trades which can bring one's cost-basis back down to a level close to the breakout level would have very high probabilities of making profit. We state this because of the following. The breakout on large buying volume means that the market is essentially bullish on this stock. If one was to sell something like a naked put for example in the upcoming March cycle, one would only need this bullishness to persist for another 6 weeks at most. Implied volatility is mean-reverting, so here the option seller has time working in his or her favor. What this means is that, over time, premium should come out of the associated options which is obviously beneficial to the option seller. Finally, even if implied volatility remained elevated over the next six weeks, one can still drastically reduce risk presently through strategies such as covered calls or naked puts because of the premium presently on offer. Source: Interactive Brokers Therefore, to sum up, we would favor a short-term strategy in OGI at present despite the bullish forward-looking expectations with respect to the company's sales. In fact, OrganiGram is not expected to post a bottom-line annual profit until 2023. Suffice it to say, if sales disappoint in upcoming quarters, positive profitability will have to be pushed out somewhat in time. We look forward to continued coverage.