Cannabis investors looking for hope after a brutal 2019 are starting to get optimistic about Aphria (NYSE:APHA) stock. The company has always had one of the more compelling stories in the sector. And prior to its most recent quarter, the company posted two consecutive quarters of profits, albeit small ones.
That being said, the company was back in the red in their last earnings report. It has some investors wondering if the brief journey into profitability was fool’s gold. This was a sentiment conveyed by my InvestorPlace colleague Larry Ramer.
But right now, I think it would be helpful for both the bulls and the bears to stop changing their expectations to fit a narrative. It’s the only way to see Aphria stock for what it really is.
Investors are Moving the Goalposts
It wasn’t that long ago when investors were souring on cannabis stocks because the companies were not profitable. Not only that, for many of these companies, profitability looked to be 18 months or more away. And that was in a best-case scenario.
So, you would think that investors would be less conflicted about Aphria stock. But, as frequently happens, investors have quickly moved the goalposts. Once Aphria recorded a profit, the expectations seem to be different. Now investors are minimizing the company’s profit because it was small and not sustained.
That’s called moving the goalposts. And in some ways, it’s a good sign. It means on some level that the negative tide on cannabis stocks may be changing.
Now to be fair, cannabis bulls could easily be accused of moving the goalposts as well. But I think the larger problem the bulls have is removing the goal altogether. You can put me in that category. I am bullish on the sector long term. But if you ask me when that will happen, I couldn’t give you an answer.
And that is largely because of what we saw from Canada in 2019. Cannabis investors are only now beginning to realize how long and winding the regulatory road can be. Cannabis companies have had to wait over a year for the Canadian market to fully open even after legalization is now over a year old.
If companies have waited that long for Canada, imagine how long the wait will be in the United States. But ultimately, that’s the market that has to open.
Consolidation Has to Happen
A lot has been made about Cannabis 2.0 which is simply the ability of cannabis companies to sell derivative products such as lotions, vapes, and edibles. However, the real “rebooting” of the sector will come through consolidation. That is a process that is still in its early stages.
Last September, I gave several reasons why Aphria may be a likely takeover target. The first is that the major players will have to show a path to profitability. In that regard, Aphria, which has already shown a profit, is inexpensive compared to its production. Plus, Aphria has access to nearly a dozen overseas markets. And the company recently received a cultivation license for its Aphria Diamond production facility.
The Bullish Case for Cannabis Stocks Is Still There
My enthusiasm for the cannabis sector is not because I visualize a world where marijuana becomes as commonplace as light beer. I’m bullish about the sector because of the use of cannabis in pain management.
In 2019, the National Institute on Drug Abuse cited that 130 people each day in the U.S. die of an opioid overdose. It is now labeled a public health crisis. And according to Professor Tariq Akhtar from the department of molecular and cellular biology at the University of Guelph in Ontario, Canada, cannabis may provide a solution.
Previously, legal questions surrounded cannabidiol (or CBD). CBD is a part of the cannabis plant that may be effective against a range of medical conditions including anxiety, cognition, movement disorders, and pain.
However, the Food and Drug Administration essentially gave the green light for CBD as the Agriculture Improvement Act of 2018 removed it from the list of Schedule 1 controlled substances. This allowed GW Pharmaceuticals (NASDAQ:GWPH) to break through with a CBD-based epilepsy drug Epidiolex.
The Times are Changing
Changing public policy is like turning a battleship. And so is getting drugs approved by the FDA.
But what investors can’t ignore is that the FDA has allowed CBD to be sold, albeit with some restrictions. And if CBD is legal, then there may be a path to legalization of different forms of cannabis. It may still be a long and winding path, and one that may be frustrating to investors. But the FDA should take their time with legalization. However, with much of the developed world ahead of the United States on this curve, there is a path.
The questions and the possibilities for Aphria haven’t really changed. Aphria stock is a long-term play on the future of cannabis, and particularly CBD, as a mainstream treatment. In the meantime, there will be many ups and downs. Invest accordingly.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.