It makes sense that I bought some Aphria (APHA) shares a week or two before the story broke that Quintessential Capital Management was shorting the stock. That seems to be my luck these days. I bought some shares of APHA around $8.50 after the stock pulled back from the mania of legalization. Clearly I was a little early, but I remain undeterred. The accusations posed against the company last week regarding executives profiting from acquisitions is certainly interesting; but the company has been battered by complaints like this before. If anything comes of it, I don't think it would mean the end of Aphria. It might just mean different management. The accusations may have done investors a favor. The stock is finally down to realistic levels. Furthermore, I wouldn't mind seeing the company stop spending on overseas assets. The money is in Canada. That's where they need to be focused.
Notions that it was reasonable to pay $15 a share for APHA were ridiculous. Coverage on earnings is sparse at best, and the estimates we do have don't paint a picture that justifies high prices. Ironic as it may be, the current pressure on the stock from accusations against the board have finally brought the stock price into buying levels. Next year estimates of $0.52 a share mean the stock is now trading at a forward P/E of around 10. That's a lot better than the forward multiples of 30 we were looking at a month ago.
I've never liked Aphria's acquisitions. The Nuuvera deal was okay. There was some strategic benefit to the domestic acquisitions in terms of gaining supply; but even their acquisitions within Canada were too expensive. They drastically diluted the stock, making recreational revenues less meaningful for shareholders. The ironic part is that the bigger names spent huge amounts of money (in stock) to drive supply potential and none of them were ready to meet the supply demands of recreational legalization. I like what's happened as a result of the accusations from Quintessential Capital. I think you'll see the company's management exercise a lot more caution on acquisitions moving forward. That's something I welcome. That's a good thing, as the focus needs to be in their domestic market.
Focus Needs to Be on Canada Anyway
Say what you wish about international potential, I consider it a bit premature to be chasing overseas expansion when you haven't even successfully realized the revenue potential of the first major country with legal cannabis. Canada is where the action is at. Canada is where Aphria should be spending its money. The supply shortcomings that occurred in November lead me to believe that we're going to see a lot of these names report weak revenues to start 2019. Aphria needs to capitalize on that, and beat its competitors.
I made a nice trade on this stock way back in 2017; buying shares around $4.50 and selling around $18. Since then, I've largely avoided the stock due to the overpriced nature, and constant dilution for financing. I obviously jumped the gun a little bit with my latest buy in, but I didn't exactly see this whole short seller fiasco coming. That said, I have no intention of selling as of now. I actually think right now might be an opportunity to buy more shares. The key in terms of timing revolves around letting this current drama play out. If it becomes clear that there really won't be any big investigation of Aphria, I think the stock is a clear buy at these prices. The only thing I care about is their production abilities within Canada. If they do in fact have the facilities in place to start producing well over 200,000 kilograms of cannabis in 2019, and can do it quicker than rivals, I think this one is a no brainer. The revenue potential of that domestic production seems to outweigh the foreign investments. Even if they lost those investments tomorrow, I think the value lies in Canadian sales. I certainly don't like the dilution, but the stock is now at a level that makes the dilution less of a problem to me.
Ever since Aphria lost out on the Constellation Brands (STZ) investment, which ultimately went to Canopy Growth (CGC) , the stock has been on the back burner in many investors minds. This new valuation might change that. I am definitely not selling my stake. If anything, I might add to it.