In a blistering month for stocks, Aphria Inc. (NYSE: APHA) has had a particularly bumpy ride.
The Leamington, Canada–based cannabis company was the target of some particularly explosive allegations from, as it turns out, a firm with substantial short interest. This is a common enough occurrence in the stock market, as Carl Icahn and Bill Ackman’s legendary “long vs. short” battle royale over Herbalife Nutrition Ltd. (NYSE: HLF) illustrates.
The short-seller’s allegations focus only on Aphria and one other, small company: Toronto, Ont.–based SOL Global Investments Inc. (CNSX: SOL). They have nothing to do with other cannabis firms we follow at the National Institute for Cannabis Investors
Since the short attack and furious price action last week, I wanted everyone to know what’s really happening with Aphria.
It’s the truth you won’t hear anywhere else – and a beautifully wrapped-up December buying opportunity…
Here’s the Most Important Thing to Know About Aphria
The negative research report carries less substance than mainstream headline writers want to believe.
As I said, it concerns only Aphria and SOL Global – none of the other companies in the cannabis world or our model portfolio are affected. It’s somewhat akin to the infamous WorldCom or Enron scandals from the early 2000s – there were charges against the two companies, but they didn’t affect any other telecoms or utilities.
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So you can breathe easy if you own a cannabis stock that isn’t Aphria.
The short-sellers’ report alleges, among other things, that Aphria engaged in some inappropriate transactions in Jamaica, Colombia, and Argentina; it makes no mention of the size of the cannabis market, the overall quality of Canadian cannabis, or the legality of cannabis in the three countries mentioned.
Now, it must be said, Aphria is guilty of something… and that’s doing a terrible job of responding to the short sellers’ allegations.
Even some of the easier ones to debunk!
The Bears’ Aphria Spiel Has Less Substance Than Headlines Indicate
As I indicated earlier, there’s less to the short seller’s report than meets the eye – a lot less. That’s not particularly uncommon with these types of critiques. In my more than 30 years in the financial industry, I’ve seen some real doozies that take tremendous leaps in logic to try to “prove” their point or just simply grab attention in a bid to send share prices tumbling their way.
For instance, a different short seller made a set of allegations against Canadian processor Cronos Group Inc. (TSE: CRON) back in August of this year.
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Yes, that would be the same Cronos that, Friday morning, announced a $1.8 billion shot in the arm from Altria Group Inc. (NYSE: MO); the same Cronos that on Friday soared higher than 30% in the best December start of any major cannabis company in the world; the same Cronos that, at the stroke of a pen, validates our thesis about the stupendous profit potential in the crossover space.
That said, I can’t predict that the story will turn out as well for Aphria. But it’s certainly true that the allegations of the short seller do not appear to be as damaging as they seem on a first look.
There are three basic claims here against Aphria:
- Negative cash flow
- Quality problems
- Affiliated transactions at inflated prices
There’s just one allegation we need to take seriously.
As far as the negative cash flow is concerned, that’s like “accusing” a fish of being too cozy with water! Nearly every publicly traded Canadian and U.S. cannabis firm currently generates negative cash flow.
This is an industry in an early-days growth phase. That necessarily takes investment, not only in property and equipment – which is capitalized – but in personnel, rent, and other operating expenses that ding near-term operating cash flow.
The charge that Aphria is making “low-quality product” rings off-key, too. The company’s primary focus was never on going the route of the smaller organic and craft players anyway. Its focus is on low cost – music to any investor’s ears. This approach is common among the large Canadian producers – Canopy Growth Corp. (NYSE: CGC), for example, has essentially embraced its identity as a “quantity-first” operation.
“Quality” issues don’t seem to be hurting Anheuser-Busch InBev S.A. (NYSE: BUD)’s Budweiser brand dominance in the beer industry, either. It puts up monstrous sales numbers and has huge distribution, yet there is opportunity for those smaller players that are growing elite-level product as a means of differentiation.
Now, like other large producers, Aphria does have a craft brand… but that product isn’t even grown in the Ontario facility described so critically in the short seller’s report.
Now we get to the meat of the charges.
Even the Worst of the Allegations Isn’t That Bad
The final major charge the short seller makes is that the company has an ongoing habit of purchasing assets at inflated prices from companies in which Aphria insiders have an interest.
Unlike the previous two, this is a very serious charge. If it’s true, it would require many of the company’s executives to face fines, bans from associating with public companies, or possibly even prison time.
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In the short seller’s telling, the scheme works like this: A company the short seller says is an affiliate, SOL Global Holdings, purchases international assets at an inflated price from Aphria and SOL insiders. According to the bear raiders, it then sells those assets to Aphria – at even more inflated prices.
That would, the short sellers say, leave Aphria with assets of dubious quality, leave SOL Global with Aphria shares, and leave the involved insiders with piles of cash.
Now, it’s true that Aphria CEO Vic Neufeld – who owns less than 2% of the company – sat on SOL’s Board. It’s also true that SOL realized a substantial profit upon the sale of the international assets.
But that isn’t uncommon. Furthermore, it by no means proves that Aphria overpaid or that parties with close connections got unusual benefits.
The cannabis industry, like other emerging industries, is filled with stories of one company realizing a licensing opportunity, securing the license, and then selling for big profits before even beginning construction of a facility.
What we do know is that, in connection with the transactions, Aphria obtained an independent appraisal and a fairness opinion from Clarus Securities Inc., one of the most important investment banks involved in the cannabis industry in Canada.
For its part, Aphria refutes the charge that its assets are “unusable” and “abandoned” by stating that the Jamaican asset, which the short seller claims is worthless, has in fact already delivered 2.5 million grams of cannabis to date. If true, that would make the property productive and valuable.
Furthermore, Aphria’s South American and Caribbean operations, which are what the short-seller is referring to in the report, are a tiny part of the overall company; those assets are more about future potential than anything else.
The truth is, Aphria still is among the top five cannabis companies in Canada, which is to say Aphria is among the most important marijuana operations on Earth.
I can’t share everything in our proprietary NICILytics database of cannabis stocks – it wouldn’t be fair to our subscribers – but I can reveal that Aphria rates up there with the best in the legal marijuana sector; it’s a five out of five. (NOTE: To learn how to get access to our tools and research and catch the American Cannabis Summit, click right here.)
It’s such an important player, and it’s attracted so much interest from everyone, that I wanted to get the news out of the way first.
Now for the “good stuff”: I’m going to show you how to lean in and buy this jewel at a discount you’re not likely to see again…
The Cold, Hard Facts Point to a Big Buying Opportunity
Right now, Aphria is trading close to its lowest price in 15 months. And we know that the stock more than tripled over a nine-week period last year to more than $22 share, its January peak. It also came within about $1 of that price in September.
We also know Aphria still has Health Canada’s all-important seal of approval, and its distribution agreements throughout the land are still intact. That’s critical in a country that, more than 51 days after full legalization, still has outlets starved for inventory. (Even the most bullish optimists, and I was certainly among them, underestimated the astronomical demand levels.)
We also know – for a fact – that some of the sharpest, savviest cannabis industry insiders were buying, not selling, Aphria shares, even after the stock crashed in recent days.
The bottom line is this: The known, certain facts outweigh, outgun, and outclass the innuendo and allegation in the bear raiders’ report. Aphria is now trading at a historic discount. I don’t believe there will ever be a better time to add Aphria’s stock to your portfolio or build on a position you already have.
Investors who disregard the negative hype and blatant, off-the-shelf short-sellers’ tactics here will almost certainly be glad they did when this blows over.
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