The past six months haven’t been great for Aphria (NYSE:APHA), but shares haven’t fallen as far as the company’s more famous peers. Aphria stock is down 27.7% in the past six months. In contrast, the more popular “pot stocks” are down much more. Shares in Aurora Cannabis (NYSE:ACB) dropped 66.5% in the same period. Hexo (NYSE:HEXO) has fallen 61%. Canopy Growth (NYSE:CGC) is down 50.9%.
Why hasn’t APHA stock performed as badly? Perhaps it’s because Aphria has historically traded at a discount to its competitors. Back in September, Aurora, Canopy, and Hexo were trading at enterprise value/sales (EV/Sales) ratios north of 30. At the same time, Aphria’s EV/Sales was just 9.5.
Today, Aphria trades at an EV/Sales ratio of 6.7. While it is by no means a “value stock,” APHA remains a relative bargain.
Does this mean its time to buy? Let’s take a closer look. Growth is priced into shares, but this overlooked pot stock could be a diamond in the rough.
Aphria Marches Towards Profitability
APHA may be an also-ranb pot stock, but the company is no slouch when it comes to market share. Aphria has supply agreements across all of Canada’s provinces. This gives them access to 99.8% of the country’s population.
Oversupply in Canada is an issue, yet Cannabis 2.0 could spur demand. But unlike Canopy or Hexo, Aphria has not announced a big infused beverage launch. Yet, Aphria does have Cannabis 2.0 exposure. Back in June, the company announced a partnership with Pax Labs to develop cannabis vape products.
Over in Europe, Aphria is betting big on medical marijuana. Especially in Germany. The company is one of just three to obtain a cultivation license there. The company’s German unit CC Pharma is the biggest piece of the Aphria pie, making up 74% of net revenues. Aphria is also a big player in Latin America, via its acquistion of LATAM Holdings.
The company’s peers are hemorrhaging cash. But Aphria stock posts quarterly positive EBITDA. The company’s strategy appears to be paying off. But why does Aphria continue to trade at a low valuation?
Why is APHA Stock So Cheap?
Aphria trades at a sharp discount to peers. As I mentioned above, Aphria’s current EV/Sales ratio is 6.7. In contrast, Aurora Cannabis has an EV/Sales ratio of 14. Hexo also trades at an EV/Sales ratio of 13. Canopy’s EV/Sales ratio is 21.9.
But there is a reason behind the discount. Aphria has a bad reputation among investors. Prominent short-seller Hindenburg Research lambasted the company in December 2018. This was due to accusations some Aphria insiders engaged in self-dealing. Aphria has been able to salvage its reputation after a management shakeup, but Wall Street still gives Aphria a skeptical eye.
Aphria’s strong balance sheet ought to counter this. The company has $348.8 million in cash and short-term investments. Aphria does have an equally-sized debt load ($356 million). But as InvestorPlace’s Ian Bezek recently pointed out, Aphria has no problems obtaining credit.
Competitors have had more trouble raising capital. Yet Aphria was able to obtain attractive financing for its Diamond production facility. Aphria lacks a strategic partner like Constellation Brands (NYSE:STZ) or Altria Group (NYSE:MO). But the company has avoided the capital crunch seen with Aurora.
The Bottom Line on Aphria Stock
Aphria stock has a clear path to profitability. Yet, shares trade at a discount to peers. Past scandals continue to tarnish the stock. But for investors playing at home, run the numbers. The company has more going for it than Wall Street gives credit.
But does this make APHA stock a buy today? Perhaps. Analyst consensus projects positive earnings-per-share in 2020 and 2021. Meanwhile, names like Aurora and Canopy will remain unprofitable. The bigger names dominate the headlines. But under-the-radar Aphria may be the best “pot stock” buy.
I remain on the fence with regards to pot stocks. I’m waiting for valuations to fall to more reasonable levels. But if you have pot stock FOMO and worry today’s prices will be a bargain in hindsight, consider APHA.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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