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Short Sellers Are Taking a Big Risk With Aphria Stock

The bear raid has pushed Aphria stock down to the point where the risk-reward favors a long position

The optimism in the cannabis sector has clearly worn off. The bears have made their presence known and the short sellers have pushed Aphria (NYSE:APHA) stock to multi-month lows.

Short Sellers Are Taking a Big Risk With Aphria Stock
Source: Shutterstock

I’m going against the grain and showing my contrarian stripes by recommending Aphria stock. Short selling can be overdone. Just as stocks can be overextended to the upside, Aphria shares have been hammered to the point of absurdity.

Aphria by the Numbers

When a stock gets pummeled over and over, most people in stock-market chat rooms and message boards will become exceedingly bearish. This is normal behavior and I’ve come to expect it. The same “gurus” who were bidding up pot stocks in 2017 when the prices were high are now shorting those same stocks at already low price points.

The numbers prove my point here. Aphria stock sports a nice low trailing 12-month price-to-earnings ratio of 11.6. This is very reasonable, not only by industry standards, but across the entire equities market.

And it’s not as if this company doesn’t have any earnings coming in. In fact, Aphria’s trailing 12-month earnings per share is approximately 30 cents. This doesn’t sound like much, but keep in mind that this isn’t a $100 stock. We’re talking about a stock that’s only $3 and change.

Some of the newer cannabis companies have no P/E ratio and negative earnings numbers. Therefore, an older and more prominent player like Aphria is more likely to withstand the current cannabis bear market, brutal as it is.

Still a Revenue Generator

Critics will claim that cannabis companies aren’t making money. But that’s an overgeneralization. Aphria’s fiscal second quarter demonstrated that the company has revenues coming in.

As indicated for the quarter, Aphria demonstrated a positive EBIDTA (earnings before interest, taxes, depreciation and amortization). This is a key measure of whether a company is profitable or bleeding money. Some cannabis companies have a negative EBIDTA, granted, but not Aphria.

Quarterly revenues totaling C$120.6 million also point to a company that’s operating in the green (pun fully intended). Moreover, Aphria’s famous Diamond facility will show an increase in its cannabis-production capacity. The previous output was 115,000 kilograms, which was already quite impressive. The target output will be an absolutely outstanding 255,000 kilograms per year.

The fiscal-year 2020, Aphria has provided highly encouraging guidance. This alone should be enough to scare away any would-be short sellers. Aphria bears should be advised that the company is predicting huge revenues for the fiscal year. Specifically, Aphria expects C$600 million, suggesting an increase of almost C$50 million in revenues during the second half of the year.

So, don’t judge the quality of the company solely on the stock’s recent price action. Look at the fundamentals as well. They’re telling a very different story than the bears and short sellers would have you believe.

The Takeaway on Aphria Stock

Listening to the gurus in chat rooms can be a dangerous practice. They love to denigrate companies just because their shares are down.

No one can deny that Aphria stock and cannabis stocks generally have taken a hit. But Aphria remains a potentially profitable company and the shares are an absolute bargain now.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/short-sellers-are-taking-a-big-risk-with-aphria-stock/.

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