The legal cannabis industry is still in the early innings of growth and as such, it is fragmented, fraught with risk and also chock full of potentially compelling growth stories. As legal marijuana is still a nascent business, many of the largest companies in this space are not that large at all, by broader market standards.
Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC) are two of the largest marijuana companies trading on major U.S. exchanges, but those stocks have a combined market value less than $19 billion. Meanwhile, Aphria (NYSE:APHA) is even further down the roster, with a market capitalization of just $1.82 billion as of yesterday, putting the shares of the Canadian medical marijuana firm squarely in small-cap territory.
Indeed, Aphria stock has the makings of a small-cap growth story and recent price action in the shares reflects as much. On Friday, May 24, the Aphria stock price surged 14.66% on volume that was more than twice the daily average after Jefferies analyst Owen Bennett initiated coverage of the stock with a Buy rating.
While small-cap growth stocks often carry premium valuations, Aprhia stock actually looks attractively valued relative to some of its larger rivals, including Tilray (NASDAQ:TLRY).
“On our strategic scorecard Aphria scores highly, and third overall behind only Canopy and Aurora,” wrote Bennett in a note to clients. “Despite its strong global outlook, its valuation is the cheapest across our space, with allegations around inflated assets/insider deals weighing.”
Changing For The Better
The year so far has seen a load of significant C-level executive changes at Aphria. Vic Neufeld stepped down as APHA’s CEO in January. Then the company’s president, Jakob Ripshtein, resigned on May 14. Interim CEO Irwin Simon, the founder and former CEO of Hain Celestial (NASDAQ:HAIN), is making his mark on Aphria’s executive team.
Jim Meiers is Aphria’s new chief operating officer (COO) and he worked under Simon at Hain Celestial for 14 years. The executive shakeups, hopefully for investors, close a controversial chapter in the company’s history. Last year, an internal investigation into acquisitions made by the company revealed conflicts of interest that Aphria executives previously denied.
““While we may just never know the exact truth around these insider allegations,” analyst Bennett wrote. “[T]he important thing for us is that the Aphria CEO at the center of the report has now left.”
It appears the dark clouds that once hung over APHA stock are parting and the shares look inexpensive.
“Comparing forecasts for Canada’s big pot companies in 2020, Canopy Growth stock trades for almost 80-times that year’s predicted Ebitda, while Aurora Cannabis stock trades for nearly 60-times. Aphria, by contrast, goes for about 10-times,” according to Barron’s.
Earlier this month, Aphria bolstered its position in Germany, the Eurozone’s largest economy, winning a fifth marijuana cultivation license there.
With that permit, the company “stands as the only licensed producer in Germany with the permission to grow all three strains of medical cannabis approved by the BfArM,” said Aphria in a statement.
Bottom Line on Aphria Stock
One issue to consider with Aphria stock is that cheap stocks arrive at the designation for various reasons and they can remain discounted for long periods of time.
In Aphria’s case, the company has enviable positions in the fast-growing pharmaceutical and vaping markets, segments that could boost margins in the coming years. Vaping, while not healthy per se, is a healthier alternative to smoking cannabis from joints, pipes, and bubblers because those products make cannabis create unhealthy tar.
APHA stock needs to gain more than 56% to reclaim its 52-week high, but in order for those lofty heights to be revisited, Aphria’s management team needs to effectively expand margins without damping EBITDA.
Todd Shriber does not own any of the aforementioned securities.
