We’re shorting Aphria, says Edgehill chief investment officer

Cannabis company Aphria Inc. (Aphria Stock Quote, Chart, News: TSX:APH) may have broken out of its slump, but there’s still too much uncertainty in the marijuana space in general, says Jason Mann of Edgehill Partners, who says that valuations are just too high for the pot stocks and that’s why he’s shorting them.

Like the other marijuana companies, Aphria has been hit with a dose of reality after its share price reached for the stars in late December and early January. Now, the stock is down by half since January 9, although there were signs of a rebound on Thursday, as APH closed up $0.49 to $10.90.

The Leamington, Ontario-based company announced on Thursday that Part III of its facility expansion is now at full capacity, producing a weekly crop harvest of 10,000 plants (anticipated to yield 380-400 kg per week). The company says that once in full rotation, the facility will more than triple its current production, growing 30,000 kg annually. In total and including its “Aphria Diamond” location and the supply coming from its BC-based subsidiary, Broken Coast Cannabis, Aphria plans to produce a whopping 230,000 kg per year by early 2019.

“We’re incredibly excited and proud of our whole team that has ramped up operations in our state-of-the-art Part III greenhouse expansion with incredible speed and care,” said Vic Neufeld, CEO of Aphria, in a press release. “As we prepare to make our first harvest from Part III later this month, work continues to rapidly advance on our 700,000-square-foot Part IV expansion, which we anticipate will have its first sale early next year.”

But the talk about all that pot being grown — not just by Aphria but by a dozen or so other companies aiming to harvest into the 100,000 kg range — has effectively led to a lot of poor investments, says Mann, who sees short-selling opportunities aplenty in the sector.

“The whole cannabis space for us has been a no-go zone for a long time, and it was that combination of great price momentum but no valuation metric that we could get our heads around in terms of what these companies should be worth,” said Mann, in conversation with BNN.

“Price momentum has obviously rolled off after the January highs, and I’ll say for the whole space that part of the challenge with that parabolic top in January was that there was about $2 billion of equity that came to market, with even some of the banks getting comfortable with listing that equity. So, you’ve got a lot of trapped buyers in this: late to the party and bought it for the legalization.”

The temptation is evident, as the main players in the cannabis space continue to make deals and ramp up production ahead of the legal weed date, said to be coming in late summer of this year. Two weeks ago, Aphria announced the acquisition of Brampton, Ontario-based company, Nuuvera, for $425 million, a move which Aphria hopes will give it more presence on the international level.

“There’s no question that there are real businesses here,” says Mann, “[but] the challenge is, what do you pay for that business today and what does their cash flow actually look like?”

“Aphria is actually a short for us, currently, as are some of the other cannabis stocks,” he says. “We don’t know how this shakes out. As a group, we think they’re headed lower [but] one-on-one, there could be take-outs in the space. Certainly, as part of a portfolio, we’d avoid them.”