Aphria Inc Stock – What You Need to Know
It seems like the more volatile cannabis stocks become, the more people show interest in them. With the entire market correcting right now, everyone’s trying to call the bottom instead of using Dollar-Cost-Averaging (DCA) to accumulate their positions over time. DCA is all about reducing a risk called “market timing”. Then there’s the concept of diversification, which also minimizes risk by not putting all your eggs in one basket. Sure, you could buy the HMMJ ETF, but keep an eye on what stocks they’re adding over time and at what weights. Always understand what you’re investing in. With cannabis stocks now beginning to trade in the U.S., it’s especially important to know the basics about each stock. Even in times of hype, management needs to be accountable for the aggressive goals they set – like 628 tons of production by 2020. This week, a form was filed for Aphria stock to begin trading on the New York Stock Exchange (NYSE). (Right now, Aphria trades on the Toronto Stock Exchange under the ticker APH.) Let’s take a closer look at the company.
The last time we looked at Aphria was just about two years ago when we talked about how their high margins put them in a great place to engage in pricing wars, the type we would expect to see when Aurora Cannabis hits their stated 570,000 kilo production target (that’s 628 tons for you Yanks out there.) People need to remember that Canadians smoked their way through 700 tons of weed in 2017. All that weed came from somewhere, and it seems like the way to displace that existing supply is through a combination of pricing and branding. Sell dirt-cheap weed to the kids who can’t afford it and sell top-shelf ganja to the MBAs among us who take inspiration from a hit of Godzilla Blood. We also need to be inclusive of all products when we analyze the Total Addressable Market (TAM) and include other product lines like wax, edibles, and cannabis drinks, all of which Aphria has their eyes on:
Now before you get a home equity loan and start backing up the truck on Aphria stock, let’s talk risk.
Aphria Stock is a Risky Investment
If you look at how Aphria stock has performed since our last article was published, you’d be right in that it has performed quite well. Two years ago, Aphria stock traded for $3.43 USD per share. (Because more than 50% of our audience hails from ‘Murica, and given that Aphria plans to begin trading on the NYSE soon, the rest of this article will use greenbacks, not loonies.) If you bought shares of Aphria back then, you’d be up +219% on your investment with Aphria now having reached a market cap of nearly $3 billion. In order to hold the stock for that long, you would have needed some serious intestinal fortitude. From January 2018 until April 2018, shares plummeted -56%. That’s called volatility folks, and another name for volatility is risk. These are risky stocks, make no mistake. Then add to that the political and legal risk of trading a U.S. listed stock which sells an illegal product. (This is why we recommend you use a broker like Zacks Trade and trade Canadian cannabis stocks on Canadian exchanges.)
How Much Weed is Aphria Selling?
Earlier we talked about Aphria’s appeal as a low-cost producer of cannabis. Being able to produce low-cost cannabis at scale, and then sell it at varying price points, will be critical for any company that wants to compete in the increasingly competitive cannabis growing space. If you’re an investor in Aphria, there are some simple metrics that you can pay attention to over time that will be easy to monitor. Pay attention to “kilos sold per quarter” and “adjusted gross margins”. Here are these metrics over time:
These values were pulled from the “Management Discussion and Analysis” documents which are posted at this location every quarter. These are rudimentary metrics that are meaningful and easy to follow. How much weed did they sell and how much did it cost to produce? Who cares how many “fully-funded” million square-foot warehouses a company has, we’re more interested in how much cannabis is being grown and sold and how cheaply it can be produced. Aphria’s management team has made it clear that these are key metrics so pay attention to them going forward. Speaking of the management team, let’s talk about them a bit.
Managing Company-Specific Risk
Staying on the theme of risk, there’s something that people in finance refer to as “company-specific risk” which refers to (in the worst case scenario) Enron-type stuff that happens because of a company’s negligence. It’s the job of the management team to manage company-specific risk, so one way to measure it is by looking at the competence of the management team in place. These people get paid millions of dollars to work their asses off and make sure nobody drops the ball. All it takes is one bad apple. In looking at Aphria’s management team, they have some tenured individuals keeping an eye on things.
Before coming over to Aphria, their CEO had a successful 21-year stint at Jamieson Vitamins, Canada’s oldest and largest manufacturer and distributor of natural vitamins, where he grew market share from 7% to 27% while expanding into 44 countries. The CCO comes from Diageo, the world’s biggest whiskey producer and one of the world’s largest producers of spirits. The CFO comes to the table with extensive experience in mergers and acquisitions. The founders come to the table with extensive greenhouse growing experience having sold to big-box retailers like Costco and Walmart. Everyone on the senior management team comes to the table with relevant experience that will help Aphria navigate company-specific risk as the company looks to rapidly scale. Of course, the best way investors can manage company-specific risk is by not investing in one stock only.
Aphria vs. Canopy Growth vs. Aurora Cannabis
As we said before, don’t put all your eggs in one basket. If you want to invest in cannabis stocks, make sure it’s a small portion of your overall portfolio and don’t bet it all on red. Just for the sake of interest, we decided to look at a few comparison metrics. Rather than ball all this stuff together into some sort of graphical monstrosity of the type you might see on Seeking Alpha, we’re going to keep it real simple. Here goes:
If you had to pick one of those three stocks, you might lean towards the one that’s profitable and focused on decreasing costs. Of course, we just warned you about not putting all your eggs in one basket, so maybe buy equal amounts of all three stocks, or just buy the cannabis ETF HMMJ. Just make sure to accumulate your positions over time by buying a set amount over a pre-determined period of time. “But if I buy these three stocks every month then the transaction costs will be too high” we can hear you say. Well, Zacks Trade will let you trade free U.S. stocks until tax day of 2019 so maybe open up an account with them. They will also let you buy stocks on the Canadian stock exchanges, except they’ll charge a bit for that.
We continue to write about marijuana stocks because you, our readers, have said you want to hear more. We’ll continue to watch this space and highlight Canadian cannabis stocks as they begin coming over to trade on major U.S. exchanges. We’ll continue to warn investors about things like risk, over-the-counter scams, and things like arbitrage which can result in people paying more for their shares than they should be. Aphria stock has filed to begin trading on the NYSE, but we don’t have a confirmed date yet or a confirmed ticker. Stay tuned.
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