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Aphria is not as good as it needs to be: fund manager

Aphria
Elliot Fishman
Cannabis LP Aphria (Aphria Stock Quote, Chart, News TSX:APHA) has fallen a long way in recent months as investors turn their backs on Canada’s pot stocks but positive signs in the company’s latest quarterly report may have some thinking that this is one name that will come out a winner.

Possibly, says Scotia Wealth’s Elliott Fishman, but that success is still a long way off.

Cannabis stocks have fizzled over the past half year as markets react to dismal-looking revenues and non-existent profits, now one year in from legalized marijuana in Canada.

Last week saw a number of major companies such as Canopy Growth Corp and Aurora Cannabis that told the tale of an industry hard-pressed by now a glut in supply as provincial regulators take their time in setting up their various retail structures.

Many licensed producers have had to deal with significant quarterly declines in revenue, returned product and greater-than-expected losses.

All of which has laid waste to any gains the pot companies may have made over the first stretch of 2019 and in many cases brought names back to levels not seen since the early days of the cannabis craze during the latter months of 2017.

Aphria is no different in that regard, where its share price rose from the $6.00 range to a high of $24.75 in January 2018 before falling back over ensuing months. This year started off well, with the stock climbing 81 per cent between January 1 and February 4, but recent months have pulled the stock lower (along with practically every other name in the space).

The stock dipped to a low of $4.95 Tuesday before making up some ground and finishing off trading on Wednesday up over five per cent.

But Aphria made headlines last month with its first quarter fiscal 2020 numbers which featured a profit of $16.4 million, its second consecutive profitable quarter, on revenue of $126.1 million, down slightly from the previous quarter. Importantly, management reaffirmed its guidance for the fiscal year, calling for between $650 and $700 million in revenue.

“This solid start to the year keeps us on track to achieve our fiscal year 2020 financial outlook,” said CEO Irwin D. Simon, in a press release on October 15. “Going forward, we remain focused on our highest-return priorities both in Canada and internationally as our team furthers the development of our medical and adult-use cannabis brands to drive growth through innovation and return value to shareholders.”

Those upbeat numbers should have folks optimistic about Aphria’s —and perhaps the industry’s chances— but don’t bet on it, says Fishman.

“[Aphria] is looking cheap now but the mystery is over. We’ve seen what they do and it’s not as good as it needs to be,” says Fishman, director of US and international trading at Scotia Wealth, speaking to BNN Bloomberg on Tuesday.

On the industry as a whole, Fishman says that momentum has gone in the cannabis space, one which he sees as dominated by retail as opposed to institutional investors.

“This is a typical ‘Buy on mystery, sell on history’ thing. The mystery is over —they don’t make any money and they aren’t going to make any money for quite some time,” he says. “Everybody is looking at it now because it’s so cheap, but what is the bottom to a stock which is truly two to three years from truly coming into the table?”

“There’s going to be a lot of volatility in these names soon. It’s getting into interesting pockets,” Fishman says. “There’s probably a lot of cannibalism that’s going to happen where these names are going to start taking each other out —and not at a premium, because they have debt, there’s no institutional capital coming this way, and retail are not as friendly and as deep-pocketed as like a Scotia Capital would be.”

Earlier this month, Aphria announced that it had received a cultivation license from Health Canada for its Aphria Diamond greenhouse, one which will add another 1.3 million sq. ft. of cultivation capacity to its roster, for a potential 140,000 kg annually.

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