Canadian cannabis producer Aphria (NYSE:APHA) is set to report its fiscal fourth quarter numbers after the bell on Thursday, August 1. Ahead of that print, Aphria stock price has plunged more than 30% since its last earnings report and APHA stock trades at fresh 2019 lows – while the S&P 500 is making record highs.

In other words, Aphria stock has been a huge underperformer ahead of the Q4 print. This huge underperformance has two important investment implications.

First, APHA stock has been weak due to multiple red flags, the sum of which are clouding the stock’s long-term outlook. As a result,  Aphria stock can’t be considered a good marijuana stock to buy for long-term investors.

Second, current trends imply that Aphria’s Q4 numbers could actually be much better than expected. Those better-than-expected numbers will spark a healthy post-earnings increase in Aphria stock price.

Overall, the strategy for APHA stock is simple. Investors who don’t mind risk should buy APHA stock before its earnings because it could pop on better-than-expected numbers. But, until this company’s long-term growth outlook becomes clearer, avoid holding onto APHA stock for an extended period of time.

Aphria’s Red Flags Are Worrisome

Aphria’s fundamentals are littered with red flags which should keep investors sidelined until the problems are addressed.

First, this company isn’t all that big. It sold just 2,600 kilograms of cannabis last quarter. That pales in comparison to the 9,000-plus kilograms of cannabis that Canopy (NYSE:CGC) and Aurora (NYSE:ACB) sold last quarter. Thus, Aphria has a lot of ground to make up if it doesn’t want to get left behind by its bigger peers.

Second, the company is shrinking where it matters. Aphria’s net revenues rose by a ton sequentially last quarter. But that gain came entirely from newly acquired distribution operations. The revenue and volumes of its cannabis business, in both the recreational and medicinal markets, dropped sequentially last quarter.

Third, its gross margins are in free-fall. Aphria’s gross margins came in at 47% in Q2. They dropped to 18% in Q3. Some of that drag was because of the inclusion of lower margin distribution revenue, but the gross margins of its core cannabis business  dropped from 50% to 36%.

Fourth, the optics have been bad for Aphria stock. Multiple top executives have left Aphria over the past few months, and a hostile takeover offer for it, which was very odd from the onset, didn’t pan out.

Fifth, the company’s balance sheet doesn’t have much firepower or protection. Aphria has around $100 million of cash and equivalents on its balance sheet. That’s not much. Two other cannabis producers — Canopy and Cronos — have multi-billion dollar cash balances. Further, Aphria’s business burned nearly $30 million of cash last quarter, and at that burn rate, the $100 million of cash on its balance sheet won’t last long.

So there are reasons why APHA stock has been weak. Those reasons should keep longer-term investors from buying Aphria stock for the time being.

Q4 Numbers Could Breathe Life Back Into Aphria Stock

Although the cloudy outlook of  APHA stock makes it a poor investment, the stock could be a good short-term trade for those who are willing to stomach the risk.

Most signs indicate that its Q4 numbers will be much better than its Q3 numbers. The Canadian cannabis market had a rough January and February. Sales of dried cannabis and cannabis oil dropped tremendously from the end of 2018 to February 2019. But, over the subsequent three months (March, April, and May), Canadian cannabis sales have bounced back.

Specifically, dried cannabis sales rose 14% in March, 16% in April, and 7% in May.  Cannabis oil sales rose 9% in March, 4% in April, and 19% in May. The numbers were mostly in the red in January and February.

So cannabis sales trends have dramatically improved over the past several months, implying that Aphria’s Q4 numbers should be much better than its Q3 numbers. Aphria stock price is down over 30% since the company reported its ugly Q3 numbers. It certainly feels like Aphria stock is pricing in ugly Q4 numbers, too.

Thus, if the company can beat expectations with strong Q4 numbers, Apgria stock could stage a sizable post-earnings rally.

The Bottom Line on APHA Stock

From an investment perspective, Aphria stock is too risky to touch. But, for traders who are willing to stomach near-term risk, APHA stock does make for an interesting earnings play, since it is depressed and heading into what could be a better-than-expected earnings print.

As of this writing, Luke Lango was long CGC and ACB.