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Aphria Stock Could Deliver Massive Gains

Will Healy

After the fluctuations of marijuana stocks over the last year, Aphria (NYSE:APHA) stock still trades more than 50% below its 52-week high. Investors sold off Aphria stock, as many questioned whether APHA was a “shell game”after it bought assets in Latin America.

marijuana cannabis

However, the executives who drove that purchase have left Aphria. The company has now hired a well-regarded executive as its interim CEO. Due to its current multiple and improved strategic decision-making, Aphria stock could move much higher as the company’s reputation improves.

Aphria Stock Became Cheap for a Reason

One of the biggest draws of Aphria Inc over more prominent cannabis players involves its valuation. In a world in which many cannabis stocks have price–sales ratios in the triple digits, Aphria supports a much more reasonable forward price-earnings (PE) ratio of about 21.7.

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But Aphria stock trades at a massive discount to its peers for a good reason. As recently as September,  APHA had come close to $17 per share. However, most marijuana stocks sold off after Canada legalized cannabis. Aphria Inc dropped further when Hindenburg Research described it as a “shell game with a cannabis business on the side.” Aphria stock fell briefly below $5 per share following Hindenburg’s statement. After APHA briefly recovered, it dropped again, and it currently trades just above $6.60 per share.

New Management Leaves APHA Well-Positioned for Growth

As a result of the sharp decline of Aphria stock, founders Vic Neufeld and Cole Cacciavillani left the company. Now, former Hain Celestial (NASDAQ:HAIN) Irwin Simon heads Aphria Inc as the interim CEO.

Under Simon, the company continues to focus on ramping up its production, to the point where it will be the third-highest cannabis behind only Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). Production at its Aphria One plant in Canada has now reached 115,000 kg . Upon completion of a new plant, that total could reach over 250,000 kg.

Also, while Aphria Inc has divested from the U.S., it now operates in ten countries.  In addition to its assets in Latin America, Aphria Inc has a meaningful presence in the large German market, as it has acquired the legal maximum of five cultivation licenses in Germany. APHA has become the only producer legally allowed to grow all three of the marijuana strains that have been approved by German regulators.

During his time at Hain, Simon built a reputation for growing companies. Simon founded Hain and led it through most of its 26-year history. Today, Hain stock has a market cap of over $2 billion, and the company owns dozens of natural-product brands.

However, Simon is 60 years old and was given the title of interim CEO. That creates uncertainty for Aphria stock, but it also provides the company with the chance to hire a new, top-notch CEO who can repair its reputation.

Low Valuation and Potential Takeover Target

Unlike most of its peers, APHA  earns a profit, and its trailing price-earnings ratio is only 22,  which is quite low for a marijuana stock . Analysts, on average, predict its earnings per share will increase by 140% this year and 75% in fiscal 2020. Even if APHA was not selling cannabis, 21.7 would be a low PE ratio, given its growth. Also, since it operates in an industry with triple-digit price-sales ratios, the multiple of APHA stock can surge tremendously.

Moreover, Aphria Inc’s  low valuation, production capacity, and strong presence in Germany make it a buyout target. Cannabis players may feel some pressure to try to buy APHA before the multiple of Aphria stock inevitably expands. This factor by itself may make taking a chance on Aphria stock worth the risk.

Final Thoughts on Aphria Stock

If APHA can restore its reputation, Aphria stock could rise tremendously. APHA trades at a steep discount to its peers, due to last year’s allegations. However, it’s also well-positioned to become one of the industry’s top producers. Moreover, its position in Germany’s market will bolster its earnings growth. If APHA’s multiple expands to levels that are comparable to those of other cannabis stocks, the owners of Aphria stock will see huge gain, assuming another firm does not buy APHA first.

As of this writing, Will Healy is long APHA stock. You can follow Will on Twitter at @HealyWriting.

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