Investor Place, Author at Green Market Report

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Aphria is moving ahead, but questions remain.

By Ian Bezek, InvestorPlace Contributor Apr 22, 2019, 10:38 am EDT

Even in a space with as much excitement as marijuana stocks, Aphria (NYSE:APHA) stood out for having as much drama as a cable TV show. If you’re a trader, APHA stock has been a dream lately. The stock rocketed from $8 to $16 in a month last summer. It then lost as much as 75% of its value, plummeting to $4, after a series of short seller reports. Since then, the stock has bounced 150% off the lows to return to the $10 level, before earnings sent it falling once more.

After all the excitement, what’s next for APHA stock? And have the company’s recent moves made it investable again, or is Aphria only appropriate for the most steel-nerved traders?

Fallout From the Bearish Short Seller’s Reports

A few months ago, short sellers hit APHA stock with heavy fire. Bearish analysts published reports suggested that Aphria’s management had engaged in unscrupulous behavior.

The short sellers suggested that Aphria was engaged in all sorts of questionable if not worse activity. The short sellers said that the company had bought phantom assets in Latin America, engaged in various double-dealing and related party transactions, and numerous other red flags.

Aphria’s board of directors engaged an independent special committee to investigate the accusations. The special committee found some troubling factors, but its results also exonerated the company in various ways. Arguably the most important finding was that the committee confirmed that Aphria’s Latin American assets in fact exist and are progressing toward commercial activity.

The committee suggested that Aphria paid near the top end of a reasonable price range for the assets, but that there is a real business there, unlike the short seller’s reports which had claimed these transactions were largely imaginary.

New Management for APHA Stock

However, Aphria wasn’t blameless either. The board disclosed that: “it appears that certain of the non-independent directors of the Company had conflicting interests in the Acquisition that were not fully disclosed to the Board.”

Probably in conjunction with that, Aphria has seen major management changes. Former Aphria CEO Vic Neufeld has stepped down, as well as Co-founder Cole Cacciavillani. Neufeld, in particular, was implicated in several of the alleged misdeeds that the short sellers identified.

In his place, Aphria has appointed an interim CEO. Irwin Simon is now in charge, at least for the time being. Simon led Hain Celestial (NASDAQ:HAIN) for more than two decades, helping that company take a dominant position in the natural and organic foods space. While it is obviously a weak spot for Aphria not to have a permanent CEO in place yet, Simon seems to have capable hands to manage the company while it recovers from the reputational blows it suffered recently.

Aphria Has a Rough Earnings Report

As William White pointed out, Aphria plummeted on April 15 after an earnings report “with losses per share of 20 Canadian cents. This is a drop from the company’s earnings per share of 8 Canadian cents from the same time last year. It was also bad news for APHA stock by missing analysts’ losses per share estimate of 4.5 Canadian cents for the quarter.”

Revenue was up, but overall sales numbers fell. The market was unimpressed, and the stock is now down around 24% since the report.

Back in December, new upstart cannabis firm Green Growth Brands(OTCMKTS: GGBXF) bid to acquire Aphria. This was a highly unusual deal for several reasons. Among them, Green Growth brands itself had just gone public as the merger of several other firms. Additionally, Aphria had a significantly larger market cap than Green Growth, making it a rather odd target for a takeover offer.

After the earnings tumble, Green Growth stepped away from their takeover attempt. It may be good for Aphria that another element of uncertainty is gone, but it’s hardly unequivocal good news overall.

APHA Stock Verdict

It’s good that Aphria has cleaned house. That was a necessary and important first step in recovering the market’s trust in Aphria going forward. But there’s still a lot to be uncertain of.

Particularly in a market where so many of the big leaders in the space have deals with credible partners, it’s easy to take a pass on APHA stock. Cronos (NASDAQ: CRON) has Altria (NYSE: MO) while Canopy Growth (NYSE: CGC) has partnered with Constellation (NYSE: STZ). Meanwhile, Aurora (NYSE: ACB) doesn’t have a major partner yet, but its management team hasn’t given us any big reasons to doubt its credibility either.

The marijuana stock sector is the Wild West right now. Many of the companies out there are going to crash and burn in the coming years. Aphria’s efforts to clean up their act are appreciated. But in such a risky sector, at least for the time being, it’s advisable to stick to more trustworthy leaders in the cannabis space.

At the time of this writing, Ian Bezek owned MO stock. You can reach him on Twitter at @irbezek.

By Aaron Levitt, InvestorPlace Contributor

Marijuana stocks have been all the rage as legalization for medical and personal use has expanded. Leading the way is superstar Canopy Growth Inc. (NYSE:CGC). CGC has been riding high as it continues to see rising sales and has racked up some major deals with blue-chip companies such as Constellation Brands (NYSE:STZ).

There’s a reason why Canopy could be one of the marijuana stocks first real winners on the race to profitability. Part of the reason is that Canopy is forward thinking. Just as it made some of the first moves into cannabis-infused drinks and other products with its STZ partnership, it’s doing so with its latest deals. That will have it front and center in the animal and pet health marketplace. Don’t laugh. Petcare is a booming and thriving business. Fertile ground for marijuana stocks to profit. And now, Canopy Growth has the chance to be the leading cannabis stock in the sector.

A Big Market for the Marijuana Stocks

It’s no secret that Americans love their pets. A 2012 Harris Interactive survey found that 9 out 10 respondents viewed their companion pets as a member of the family. The survey also found that these respondents were willing to do whatever is necessary to ensure the health of their pet. And in that love and willingness, many Americans tend to spend almost nearly as much money on them as we do our own children.

The American Pet Product Association data shows that annual expenditures by consumers for their pets have grown in each of the last 18 years. This includes during the Great Recession. Last year alone, Americans spent a whopping $72.56 billion on their pets. This includes $18.3 billion on veterinary care and $15.5 billion on supplies and over-
the-counter medicines. This year, the APPA estimates that number will surge to more than $75 billion. The truth is, American’s are very willing to spend on their fur babies.

What does this have to do with marijuana stocks? While cats and dogs are very different than people, they do benefit from some of the same treatments for ailments. A lot of feline and canine drugs have been derived from their human counterparts. For example, our vet prescribes half a Benadryl tablet for our dog when his spring allergies start.
With that, it stands to reason that dogs and cats may benefit from similar positive health-effects from cannabinoid and hemp-based CBD products. Already, several studies are underway with the both Colorado State University and the University of Pennsylvania School of Veterinary Medicine looking into CBD treatments for pets with osteoarthritis/joint pain and epilepsy. Meanwhile, just as there is a big and growing market for human supplements using CBD, there’s massive potential for pet products as well.

For the various marijuana stocks, this is a huge untapped market that they certainly can compete in, now that the Farm Bill has passed and hemp-based CBD is legal in many items. For Canopy Growth, the potential seems very big considering its recent moves.

Canopy Growth Could Be the Leading Marijuana Stock for Pets

CGC is poised to win in the booming pet care market thanks to another smart partnership. Around the end of March, Canopy cut a deal with Sequential Brands Group. The deal with Sequential puts CGC right into the thick of the pet care market as the collaboration focuses on the pair developing new hemp-derived cannabidiol (CBD) products for
animals. The deal was sort of swept under the rug as other marijuana stock news was breaking around that time. But in the deal, was a huge coup for Canopy. And that was Martha Stewart.

Yes, that Martha Stewart. The homemaker and entertaining queen provides plenty of brand cache for Canopy as she will become a strategic advisor on the firm’s pet and hemp-product lines. Stewart has long been a pet advocative and her chow chows have become stars in their own right. With her on board, sales for whatever CGC develops could quickly find a foothold and command some high market share in the CBD pet product sector.

One of the chief reasons why Canopy has been crushing other marijuana stocks has been the strength of its celebrity and major corporate partnerships. The firm has been able to get out in front of some major trends — like CBD-infused drinks — and has been able to capitalize on that with big deals. Pets and animal health will be no different. By adding Martha to the mix, it legitimizes its future products and gives it a major edge on supermarket shelves. That’s something other pet-focused marijuana stocks like Medical Marijuana, Inc. (NASDAQ:MJNA) or CannTrust Holdings(NYSE:CTST) may not be able to match. All in all, it’s just another reason why CGC is pulling away from the pack.

Forget the Other Marijuana Stocks

The reality is, the cannabis sector is quickly turning into a one or two horse race with Canopy leading the way. The firm continues to make major transformative deals to get itself out in front of major trends. It’s under the rug deal with Sequential Brans puts it right front and center in a huge and growing market. The branding with Martha Stewart will only enhance that further. For investors, it’s just another example of why CGC is the cannabis stock to own.

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

Leveraging both capacity and quality, Aurora Cannabis stock is a cut above the competition

By Josh Enomoto, InvestorPlace Contributor

Over the long run, I remain net bullish on legal marijuana. However, my optimism for the sector doesn’t cloud reality. I can see as plain as daylight that the honeymoon phase is over. Now, companies like Aurora Cannabis (NYSE:ACB) must provide the goods. If not, ACB stock could face serious trouble.

Unfortunately, this isn’t just a hypothetical musing.

After jumping to a tremendous start to 2019, Cronos Group (NASDAQ:CRON) started to weaken ahead of its fourth-quarter earnings report. On the disclosure of the financial print, Cronos rang up disappointing revenue. As a result, shares slipped badly.

On the one hand, it’s questionable if CRON can recover in the nearer term. On the other hand, Aurora Cannabis stock presents a contrasting picture. On a year-to-date basis, shares are up over 85%. Not only that, ACB is one of few publicly traded cannabis firms that has generated shareholder profits every month thus far.

How does ACB stock stand out from the competition? Primarily, management consistently delivers ridiculous sales growth. For instance, in its most recent fourth-quarter earnings report, the company generated 54.2 million CAD. Against the year-ago level, revenue had skyrocketed 363%.

However, not everything about Aurora Cannabis stock embodies confidence, which is why shares have sometimes exhibited volatility. For instance, in Q4 2018, analysts recognized a glaring defect in Aurora’s numbers, and management disclosed losses of nearly 238 million CAD.

In Q4 2017, Aurora only mustered 11.7 million in sales. However, they translated that comparatively small haul into 7.7 million in profits. With the latest earnings result, it appears Aurora is taking one step forward and two steps back.

Understandably, stakeholders and prospective buyers in ACB stock want a clearer and more consistent picture before diving into Aurora shares. But if you’ve got the nerve, Aurora is one of the most credible names in the sector.

Multi-Layered Tailwinds Boost ACB Stock

Whenever anyone discusses Aurora Cannabis stock, one of the top bullet points is production capacity. According to its website, Aurora has 11 production facilities, translating to a total funded capacity exceeding 500,000 kilograms a year.

To put that into context, ACB’s only real rival in this space is Canopy Growth(NYSE:CGC), which forecasts similar figures. But from there, the competition drops offdramatically. Although they round out the top four, Aphria (NYSE:APHA) and Green Organic Dutchman (OTCMKTS:TGODF) can only produce approximately 255,000 kilos and 195,000 kilos, respectively.

But it’s not just outright capacity that makes ACB stock shine. Rather, management has made in my opinion strategically powerful decisions. A prime example is Aurora’s buyout of Whistler Medical Marijuana. Several critics blasted the move due to Whistler’s puny 5,000 kilos of annual production.

What they overlooked was Whistler’s specialty, which isn’t focused on quantity, but rather quality. The acquired company features an extensive genetics bank from which they produce strain-specific products.

This is a critical point because growing marijuana isn’t rocket science. But finding the right strain to address certain ailments? That’s very much a vital skill set, and the Whistler buyout will help distinguish Aurora Cannabis stock.

Combined, ACB is better positioned than most to advantage the U.S. government’s slow but steady progress toward full legalization. While I don’t want to make too many bold predictions about our political landscape, the signs certainly justify optimism.

And what if the rest of the world opened to legalization? That would definitely spike ACB stock. Better yet, it’s not out of the realm of possibility. Last year, Thailand and South Korea — which are both conservative countries — legalized medical cannabis. Although heavy restrictions apply, these are unprecedented examples of forward thinking.

COMPARE BROKERS

Don’t Shy Away From ACB Stock

Despite making my pitch for ACB stock, it pays to have a cautious approach. Unlike other industries, cannabis is extremely emotional. Bad news travels very quickly here, and sometimes unfairly.

Plus, you’re talking about an investment that has soared in a very short period. I don’t care what it is, nothing rises indefinitely without incurring a correction. Given sector fears and concerns about sustainability, I wouldn’t be surprised if Aurora Cannabis stock takes a hit.

But if it does, you can bet that I’ll be eyeballing my desired entry point. When you have both capacity and credibility in this segment, you’re more likely to win out in the long run.

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

Aurora Cannabis has plenty of opportunities and some major risks as well

By AARON LEVITT, InvestorPlace Contributor

For Canadian cannabis producer Aurora Cannabis (NYSE: ACB), the last few years or so have been wonderful, to say the least. ACB stock is up more than 75% this year and it is up more than 700% in the last five years. That’s some pretty torrid growth, which underscores the potential of legalized marijuana.

Aurora has some very distinct advantages that should make investors very happy and potentially lots of money as the cannabis sector expands.

But ACB does have some warts as well. The fast-moving pot producer isn’t all squeaky clean. And despite its pedigree and recent returns, some of these issues are major ones. And a few could derail the good times at Aurora.

The question for investors is whether the pros outweigh the cons with ACB stock. With that, here are some of the major pluses and minuses for the cannabis producer.

Two Big Pros for Aurora Cannabis Stock

Aurora Is the Marijuana Producer: When it comes to cannabis, Aurora is the biggest. As it has grown over the last few years, the firm has expanded its operations and now has operations in 24 different countries. That’s a big deal as analysts peg the global marijuana market being worth around $63.5 billion by 2024. ACB is up to the challenge of providing plenty of pot to these consumers. According to its last presentation, Aurora’s 11 growing facilities have the ability to produce 500,000 kilos of marijuana per year. Recent expansion/buyouts could put that closer to 750,000 kilos. That’s an enviable position versus many of its rivals and it provides a huge scale advantage. That scale is working in its home town. Right now, ACB sells about 20% of all the weed legally sold in Canada.

In the end, this big moat should allow Aurora to gain plenty of market share globally and become the No. 1 seller of cannabis.

Aurora Cannabis Has Some Major Backers: Trian Fund Management has been one of the most successful hedge funds in consumer product firms. Much of that success comes down to head manager and founder, Nelson Peltz and his knack for finding and turning around companies with great brands. And it seems that Peltz has taken a shine to Aurora.

Mid-March, ACB announced that Peltz was coming on board as a strategic advisor, with Peltz mentioning that “Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain and is poised to go to the next level across a range of industry verticals.”

Peltz’s main job will most likely be to guide ACB through its M&A plans, designing its consumer-facing brands and perhaps push it toward various corporate partnerships. An area that it is severely lacking in. In the end, having Peltz as an advisor is a big win for Aurora and shows that its model is clearly working.

ACB’s Three Major Cons

ACB Is a Share Dilution Machine: One of the biggest hits for Aurora Cannabis has to be its continued issuance of shares. Stocks issue shares for one reason and that’s to raise capital for growth or acquisitions. That’s just what ACB has done. Aurora made a major-sized buyout of South American ICC Labs as well as several smaller firms. Fifth-teen to be exact since 2016. While you can argue that these were necessary to grow into the largest producer of weed, the problem is it has paid for many of these acquisitions with shares of stock, warrants, convertible notes and options. Add these up and ACB is looking at roughly 1 billion in total shares. That’s much higher than the 16.2 million it had at its IPO in 2014.

The problem is, with that sort of dilution it becomes hard for a firm to actually get good per-share profits. The same dollar is spread over more shares. This plays havoc with share price valuations. Given the late stage of the market and overall volatility, investors may not be willing to accept such scraps — especially if rivals are able to get better earnings-per-share numbers.

Aurora Has No Partners: One of the biggest catalysts for the cannabis sector is that many big firms from outside the sector are looking into marijuana for growth. Fellow cannabis stock, Canopy Growth (NYSE:CGC) secured a $4 billion equity investment from beverage firm Constellation Brands (NYSE:STZ), while Cronos Group (NASDAQ:CRON) scored a $1.8 billion buy-in from tobacco firm Altria (NYSE:MO). Meanwhile, Tilray (NASDAQ:TLRY) managed to score two partnerships — one with drug maker Sandoz and the other with Anheuser-Busch InBev (NYSE:BUD).

And yet, no one has come calling for ACB. For Aurora, that puts it in a hard place. Its rivals are looking to sell pot beyond its normal usage. That could and will lead to revenues from an outside sector and ultimately, a much quicker path to profits. Given ACB’s share dilution, this could be a big problem later on.

Aurora and Plunging Pot Prices: The problem is, the cat is out of the bag when it comes to legalized marijuana sales. It’s now a gold rush to fill consumer demand. And while ACB has plenty of scale, it’s still under the whims of commodity pricing — and that’s just what weed is at this point, a commodity.

Lower wholesale pricing has hurt Aurora’s bottom line last quarter. Per-gram prices for dried cannabis plunged 21% year-over-year and 26% sequentially from the first quarter. At the same time, ACB managed to see a big drop in higher-margined extract pricing as well. Here, extracts saw a big 25% year-over-year drop. While it’s still very early in the cannabis boom, these drops don’t necessarily bode well for the future. Sure, ACB has seen rising sales. However, if you’re pulling in less revenue per transaction, it’s not a good thing. Just ask any oil company what that does to your bottom line.

It’s still early in the days of legalized weed, but lower sequential and year-over-year prices is a troubling trend for the industry.

ACB Stock May Still Be a Buy

For investors looking at the marijuana sector, Aurora Cannabis stock has a lot to offer portfolios. It has a huge moat, large global presence and some very strong relationships with key corporate insiders. This should help the firm over the long haul and ultimately, boost its share price.

However, it’s a risky play, as is most of the sector. High shareholder dilution, plunging pot prices and a lack of major outside partnerships could hit the stock in a major way. All in all, ACB stock could be a buy, but investors need to be aware of its risks.

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

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