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Aphria Stock Is Ugly but Still Here, and That Is a Win

Josh Enomoto

By now, most InvestorPlace readers who follow my work will recognize my overall bullishness toward marijuana stocks. However, not all sector players are built the same, as controversial Aphria (NYSE:APHA) can attest. In an industry where competitors feed off each other, Aphria stock is in many ways a major liability.

Aphria Stock Will Take a Long Time to Dig out of Its Hole

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That’s because for all the work toward credibility that marijuana companies forward, APHA stock undoes this broader effort. As you may recall, Aphria was involved in a massive scandal over the past several months. It began with a short-seller’s report making a damning accusation: management engaged in shady dealings for acquisitions that mostly benefitted insiders at the expense of shareholders.

In response, the company’s board of directors hired an independent committee to investigate the accusation. Eventually, that led to the ouster of former Aphria CEO Vic Neufeld and co-founder Cole Cacciavillani. Hain Celestial’s (NASDAQ:HAIN) Irwin Simon stepped in as interim and now full-time CEO. In theory, this should spark a new direction for Aphria.

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And to some extent, Simon helped steady the ship. Unfortunately, the company still has a credibility problem, which impacts both APHA stock and the cannabis industry. First, during the height of the controversy, Aphria promised to issue a line-by-line rebuttal of the short-seller report. Not only did management fail to provide that rebuttal, but they’re also playing dumb about the whole issue.

Second, APHA still maintains vagaries in its financial reporting. That makes Aphria look amateurish compared to proper heavyweights like Canopy Growth (NYSE:CGC). It’s also a bad look for the stock, with investors questioning the equity’s longer-term viability.

Is it finally time to let APHA stock go?

Aphria Stock Is Still Risky, but Also Tempting

On the surface, I can’t help but have reservations toward APHA stock. We’ve seen short sellers attack marijuana firms before, but this was a very specific accusation. Worse yet, the targeted company is being very coy about the incident.

As I dig deeper, the narrative gets uglier. Like I said before, it doesn’t help that rivals are complying with GAAP reporting and regulatory standards. And more recently, the illegal growing scandal impacting CannTrust (NYSE:CTST) clouds the entire cannabis industry. Bluntly, why buy Aphria when you have so many other superior options available?

It’s a fair question and explains why part of me is extremely hesitant about these shares. On the other hand, the speculative side of my brain wonders why APHA stock has effectively mitigated PR damages.

For instance, if you look at the year-to-date return for Aphria stock, they’re firmly in positive territory at nearly 23%. Yes, APHA dipped badly in July, but it came back strong this month. I’d say that’s unusual for a company facing incredibly damaging accusations, especially one doing a poor job defending itself.

Furthermore, I can’t help but ask an obvious question: why did Irwin Simon decide to not only jump to cannabis but also to take over one of the industry’s most controversial companies? Earlier this month, Simon told Mad Money’s Jim Cramer that “cannabis is big business,” and that Aphria has a strong foothold in this market.

I don’t think this is your typical corporate rah-rah speech. Simon had a perfectly fine career in a perfectly fine (and inoffensive) industry. By jumping to marijuana, he could easily damage his reputation. Therefore, the fact that he’s willing to put his neck out gives me confidence toward Aphria stock.

Markets Are Also Demonstrating Belief in APHA Stock

Of course, you typically shouldn’t base your investment decisions on what other people are thinking or doing. That said, Aphria stock is a different beast because of its underlining industry: cannabis stocks are heavily narrative-driven.

But ultimately, the markets represent the true arbiters of any equity. And right now, they have established that the $7 price point is strong support for APHA stock. So long as it can maintain this level, I think the upside potential is greater than the downside risk.

That’s not an invitation to load the boat. As I mentioned up top, Aphria stock has no shortage of bearish catalysts. But because of this robust minefield, APHA really should have collapsed by now. That it’s holding its own despite the risks implies that the bulls will give this troubled name a second chance.

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

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