Investing in Cannabis Companies: A View on Canadian Producer Aphria

Public Canadian cannabis producer Aphria (NYSE:APHA) spent the new year in recovery mode after shares dropped as much as 29% on December 3rd when hedge fund manager Gabriel Grego announced a short position on the stock. Why? Grego accused Aphria of overpaying for acquisitions to line the pockets of insiders. A special investigation was launched to reveal if Aphria did indeed overpay and has yet to release any findings.

The stock initially crashed from $7.81 to a low of $3.75 a share but has since rallied back to $6.68 as of January 21st. Truth to the allegations likely won’t make or break the company - but sales numbers will. At the time of writing, they were still way under production targets, waiting on approval for additional capacity facilities from Health Canada.

We’ve been keeping an eye on stocks across the Canadian cannabis industry and Aphria was already in bad shape before its drop in December. Selling for as high as $19.57 early in the year, Aphria had down-trended sharply since September 2018, landing it under $8 a share before the December 3rd dump.

The Volatility of Investing in Cannabis Companies

Look, the reality is this is a new market and we are in for the long-game here. Investing in publicly traded Canadian cannabis companies is a bit of a game of musical chairs right now. Much of their valuation is purely speculative in a rapidly changing legislative environment (this applies in the United States too of course). Most companies are not near making profits. The dream of picking the winning horse in this environment is evident and possible, but investors must know what they are getting into. The volatility of these stocks often fluctuates values more than 25% in a matter of days! and these companies have yet to face real [international] competition. Remember that most of the major producers, like those of us in the United States, haven’t even federally legalized cannabis yet.

The biggest obstacle a cannabis company like Aphria faces right now is bad publicity. All of us in the cannabis vertical should remember that. Their CEO stepped down since the launch of the investigation and continued negative headlines could discourage big businesses from taking a stake.

If Aphria can up their production and avoid any more bad press, an investment from big business would likely cause their share price to increase again since it is currently a relative bargain, trading at 1/10 the cost of much of the competition. We may also see their remaining value dwindle, eaten by better-funded competition. In the market of publicly traded Cannabis, it's still a flip of the coin.

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Jonathan Garder, The short seller that accused Aphria of being ‘a shell game with a cannabis business on the side’ declares victory, but the stock is surging, Markets Insider, Business Insider, January 11, 2018.

Gabriel Grego, Aphria: A Shell Game with a Cannabis Business on the Side, QCM Funds website, December 3, 2018.

Tom Hymes, 2019: The Year of the Corporate Cannabis Lawsuit? MG Retailing Business Branding, January 10, 2019.

Ian Robertson, Green Growth Brands Reaffirms Commitment to Takeover Aphria Inc., TMX Money, December 31, 2018.

Daniel Sadeh, Bernstein Liebhard LLP Reminds Investors of the Important Upcoming Deadline in the Shareholder Class Action Lawsuit Against Aphria Inc. – APHA, Globe Newswire, January 14, 2019.

Vanmala Subramaniam, Haywood Securities Defends Legitimacy of APhria Assets in Analyst Report, The Growth Op, January 11, 2019.

"Is Aphria a Buy?" Yahoo! Finance. January 20, 2019.

Murphy, Mike. "CEO of Canadian Pot Producer Aphria to Step Down: Report." MarketWatch. January 11, 2019.

Speights, Keith. "Why Aphria Stock Is Crashing Today." The Motley Fool. December 03, 2018.