Aphria Stock Just Has Too Much Drama and Not Enough Value

Tom Taulli - finance.yahoo.com Posted 5 years ago
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When it comes to marijuana stocks, there always seems to be drama. Hey, it’s an industry that is in the hyper growth phase, kind of like what happened during the late 1990s with the dot-coms. But Aphria (NYSE:APHA) has taken the drama to another level. To get a sense of this, just look at the chart. It’s been a roller coaster. A year ago, APHA stock went from $8.80 to $14 by September. Then the shares got crushed, plunging to below $6 in early December.

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Yet this did not mark the end of the volatility of Aphria stock. There was another rally to $10 and yes, the shares would then fall back to $6.

Yes, this has been a dream for quick-moving traders. But as for those with a long-term bent, it’s been a loser.

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So then why all the volatility?  What’s going on here?

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A Closer Look at Aphria Stock

First of all, in December Green Growth Brands (OTCMKTS:GGBXF) launched a buyout bid for the company even though it was much smaller (although, the company had the backing of a billionaire). Yet Green Growth Brands has recently abandoned its buyout effort, and the result was an $89 million payout to Aphria. It appears that a main reason was another example of drama for Aphria stock: its fiscal third quarter earnings report. Simply put, it was downright awful.

The company reported a net loss of 20 cents a share and revenues of 74 million CAD. On the other hand, the Street was looking for a more modest loss of 4 cents a share and revenues of 83 million CAD. On the news, Aphria stock dropped about 15%.

But this was not the end of the bad news! In response to negative reports from various short sellers, Aphria set up an independent special committee for an investigation of the allegations.

The conclusion? Well, it was mixed. On the positive side, the board noted that the assets purchased in Latin America were not a sham (although, the valuations were certainly at high levels). On the negative side, there were examples of conflicts of interest with senior executives, and the CEO and co-founder have since departed.

Irwin Simon has come in to take the post as interim CEO. Keep in mind that he has a strong resume, with more than 20 years as the head of Hain Celestial (NASDAQ:HAIN). He looks like the right person to bring some stability to Aphria.

Bottom Line on Aphria Stock

The growth prospects for cannabis remain strong. According to a research report from the United Nations, the spending is about $150 billion per year. But of course, the near-term opportunity is in Canada, which is expected to see 4.3 billion CAD this year. And in the coming years, we’ll likely see more countries legalize cannabis for recreational purposes.

There is also the emerging opportunity for cannabidiol (CBD), which is a compound that has shown medical efficacy (such as for pain). In last year’s Farm Bill, Congress removed this from the illegal substance list.  This is likely to unleash growth in CBD spending in the US.

Yet despite all this, I think investors need to be selective with marijuana stocks. And for the most part, there seem to be better alternatives than Aphria stock. Again, the company has to deal with a wrenching transition with its leadership, which will take time, and the financials have been underwhelming.

I’d instead look at companies like Cronos (NASDAQ:CRON) and Canopy Growth (NYSE:CGC). They not only have strong production and distribution channels but also the benefit of big-time strategic backers like Altria (NYSE:MO) and Constellation (NYSE:STZ) respectively. Such advantages will definitely make it difficult for other players like Aphria to get an edge.

Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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