Since mid-November, Aphria (NYSE:APHA) has staged a nice rally, up about 23% or so. But of course, this is a blip when compared to the grueling bear move that began in April. At the time, Aphria was fetching more than $10 a share.
The selling has impacted just about all cannabis stocks like Cronos (NASDAQ:CRON), Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). There has simply been no safe haven in this part of the market.
A big part of this has been due to the disappointment of the Canadian segment. The fact is the government authorities have not been agile enough to streamline the process, such as to allow more retail outlets. In the meantime, black market activities have taken a toll and there has been little enforcement to deal with this.
Nevertheless, I still think there are opportunities with cannabis stocks — and Aphria should be at the top of the list. True, the volatility is likely to continue. But for the most part, the long-term prospects look bright.
Let’s take a look.
Aphria is much more than just recreational cannabis. Note that the company has a thriving business in the medical industry, which is a massive opportunity. About 76% of total revenues come from CC Pharma, which is its German pharmaceutical distributor. Just some of the products include prescription drugs, tinctures, softgels, oral strips, transdermal patches and so on.
Here are other factors to consider when it comes to the medical segment:
- Aphria is the only licensed producer in Germany to grow all three strains of medical cannabis authorized by the government.
- There is an exclusive partnership with the Colombia Medical Federation, which has relationships with over 70,000 doctors and other medical professionals.
- Aphria is currently working with the Hospital Garrahan, in Buenos Aires, for a clinical study targeted on children with epilepsy.
The growth story is solid. In the latest quarter, revenues soared by 849% to $126.1 million. The company has also been aggressive with its production capabilities. To this end, the annual output capacity is expected to reach 225,000 kilograms. The Aphria One facility, for instance, has a full crop rotation of more than 600,000 plants.
The company has been investing overseas as well. A major driver for this has been in Germany, with facilities in places like Bad Bramstedt and Neumünster. There is also ongoing expansion in South America.
It’s important to keep in mind that the company has $463.3 million in the bank and modest debt. In other words, Aphria is in a position to capitalize on acquisitions as potential targets are now at much lower valuations.
And in terms of the full-year forecast, the company is expected to hit 500 million CAD in cannabis and 1 billion CAD by 2020.
Valuation and Sentiment
Not long ago, most cannabis stocks were at nose-bleed valuations. They were, frankly, ridiculous — assuming unending growth.
But the wrenching bear move has brought rationality to the sector. As for Aphria, shares are trading at much more reasonable levels, with the market capitalization now at about $1.2 billion. Oh, and the company is profitable, which is rare for cannabis stocks. So the trailing price-to-earnings ratio is roughly 16.5.
Finally, investor sentiment is downright awful. Wall Street has pretty much thrown in the towel with cannabis stocks. But of course, it is times like this when value opportunities emerge. More importantly, Aphria is one of the top players in the industry — and has the wherewithal to survive the challenges but also find ways to continue to grow.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.