Prepare for Cannabis’ Second Act and Hold Your Aphria Shares

Solid financing and the implementation of Cannabis 2.0 will drive Aphria's growth in 2020's first half

While it’s common knowledge that pot stocks like Aphria (NYSE:APHA) are big movers, one wouldn’t think so given its tight price range of the past two weeks. But don’t be lulled into thinking that Aphria shares are likely to continue their sideways trajectory for much longer; as they say, “The longer the base, the higher in space.”

Dig Your Heels in and Hold Your APHA SharesOf course, people reciting a cliche doesn’t make it happen, but I’m not expecting Aphria stock to remain range-bound for much longer.

Personally, I’m bracing for a sizable move in all cannabis stocks, with Aphria stock leading the pack and lesser companies riding its coattails to new highs.

Cannabis 2.0 Will Finally Kick Into High Gear

Retail investors have a tendency to buy on hype and get the timing all wrong. Regrettably, many neophyte traders grabbed Aphria shares with both hands when the mainstream media was trumpeting Cannabis 2.0’s advent in September, only to watch the stock price wilt like an unwatered pot plant.

Those unfortunate investors had, I believe, the right idea but less-than-ideal timing. As you may recall, the adult recreational use of cannabis (including oils, sprays, and dried flower) was legalized throughout Canada on Oct. 17, 2018, and this year the announcement was made of what’s informally known as “Cannabis 2.0” (or as I like to call it, “The Cannabis Empire Strikes Back”).

A year to the day after the original-flavor Cannabis 1.0, the second installment comprised Canada’s decriminalization of “cannabis derivatives”: vapes, chocolates, gummies, cookies, shakes, juices, beer, you name it. If you don’t mind the stats being expressed in Canadian-dollar terms, research firm Deloitte offers an impressive breakdown of Cannabis 2.0’s profit potential:

Deloitte estimates that the annual Canadian market for edibles and alternative cannabis products is worth C$2.7 billion. The vast majority of this burgeoning Cannabis 2.0 market will be cannabis extract-based products, including edibles, which we estimate at C$1.6 billion alone. Yet there is significant opportunity elsewhere, including cannabis-infused beverages (C$529 million), topicals (C$174 million), concentrates (C$140 million), tinctures (C$116 million), and capsules (C$114 million).

If you’re serious about Canadian cannabis investing, I recommend reading the full report as Deloitte definitely conducted their due diligence on the market. As for the investors who got the timing wrong, they jumped in too soon: Canada’s cannabis companies are required to wait 60 days before selling those derivative products, meaning that the products won’t be on the shelves until the second half of this month.

So, if you’ve been waiting for a better time and a favorable entry point, I’d say now’s your chance. Aphria’s an absolute monster with the ability to produce 700,000 kilograms of cannabis product annually, and I expect the company to be first-to-market when the floodgates finally open and Canadians make a run for the cannabis-infused comestibles en masse.

A Diamond in the Rough

Another reason to choose this particular company is its solid financing — a rare feature in the cannabis space. Indeed, Aphria finished the August quarter deep in the green with $460 million CAD showing on their balance sheet plus an additional $542 million CAD in capital assets.

Moreover, Aphria recently announced that an unnamed large Canadian chartered bank facilitated $80 million CAD in financing for grow facility subsidiary Aphria Diamond. Interim CEO Irwin D. Simon emphasized the Aphria Diamond investment as broadly emblematic of the company’s secure financial footing:

Aphria has the largest cash balance in the cannabis industry without the dilution of a strategic partner… We are pleased to have secured a term loan that will repatriate a portion of our investment in Aphria Diamond, to be strategically deployed by Aphria. This loan strengthens our balance sheet without being dilutive, and positions Aphria Diamond for success as we expand into new categories and growth opportunities in cannabis to enhance value for shareholders long term.

While admittedly a company’s CEO (interim or otherwise) must serve as its pitchman, I’m willing to go along with Simon’s assessment of Aphria as a financially sound company even amid an often-insecure Canadian cannabis market.

The Time Is Right for APHA Stock

If you timed your entry poorly and bought Aphria shares too early, I would suggest practicing self-forgiveness, learn from the experience, and hold on to your shares. Given Aphria’s comparatively stellar balance sheet and with cannabis’ real second act coming soon, neophyte traders may get a rare second chance in the markets. Lesson learned, and profits earned.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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