Although it has risen from recent lows, the pain for Aphria (NYSE:APHA) stock continues. With the credibility of Aphria’s management called into question by short-seller research reports, APHA has now fallen below Cronos (NASDAQ:CRON) in market cap. Nearly all pot stocks fell after their product became legal in Canada. Still, Aphria stock also trades at multiples well below that of its peers.
However, due to hemp legalization in the U.S., marijuana companies can invest more freely across state and national lines. As a result, interest in cannaAll Postsbis stocks looks poised to rise again. With APHA trading at a much lower valuation than its peers, the case for a risky contrarian play in Aphria stock only grows stronger.
Aphria stock remains risky
Recently, I had backed APHA stock. It looked cheap compared to its peers. However, with short seller Hindenburg Research calling Aphria “a shell game with a cannabis business on the side,” APHA stock fell. Even though it saw a slight recovery over the last few days, it trades about 70% below its 52-week high.
Hindenburg and others allege Aphria’s management used shareholder assets to purchase overseas firms at above-market prices using shell companies. Many believe that Aphria insiders held positions in the acquired assets. Aphria stock rose after the company responded to the charges. They said a special committee would review one of the acquisitions. Aphria suffered further as it came to light that Health Canada cited the company as non-compliant on record keeping, production and sanitation practices.
With such accusations, investors must consider the serious risks that come with owning Aphria stock. The charges could represent short seller interests trying to maximize personal gains. They could also expose possible issues with the leadership that could deeply hurt or even destroy the company. While I usually do not agree with those who refer to investing as “gambling,” buying a stock becomes more of a gamble under such conditions.
Interest in cannabis stocks persists
Despite Aphria’s issues, weed companies remain in demand. Many cannabis stocks lost some sex appeal once their product became legal in Canada. However, hemp will become legal in the U.S. once President Trump signs the farm bill. This provides a segue for Canadian pot firms to enter the U.S. market.
President Trump has also signaled openness to the idea of leaving marijuana policy to the states. With cannabis enjoying some form of legal status in 32 of the 50 states, these policy shifts enable the U.S. to experience its own green rush. The recently announced $1.8 billion investment in Cronos by tobacco giant Altria (NYSE:MO) confirms this interest.
For this reason, I again see a case to buy Aphria stock. As our own Luke Lango argues, the cheap valuation of APHA could also make it an acquisition target. APHA stock trades at a forward P/E ratio of 13.8. The same metric comes in at 231 for Canopy (NYSE:CGC), 53 for Aurora (NYSE:ACB), and 246 for Cronos.
For my money, I prefer Canntrust (OTCMKTS:CNTTF). It trades at a 25.8 forward P/E, and it will soon trade on the New York Stock Exchange. It also does not face the type of charges that have hurt Aphria stock.
However, the high demand for cannabis stocks indicates that Aphria could also attract investor interest. If such an investment or takeover also forces reforms or changes at the top, Aphria stock would likely surge higher.
The Bottom Line on Aphria Stock
Despite a tarnished reputation, a low P/E ratio and the high demand for marijuana stocks could revive Aphria stock. To be sure, the current stature of Aphria’s management makes APHA a risky bet. From an outsider perspective, trying to figure out whether one is dealing with overblown fears at best or the next Enron at worst becomes difficult. For this reason, investors need a high risk tolerance to consider buying APHA.
However, demand remains high, and the Altria-Cronos deal shows that investor interest remains. APHA’s low P/E ratio compared to its peers also implies strong upside potential. Aphria will have to make difficult changes to unlock this value. However, if the company can improve its reputation, the upside potential in APHA stock could become too huge to ignore.
As of this writing, Will Healy is long CNTTF stock. You can follow Will on Twitter at @HealyWriting.