In less than six weeks, Aphria (NYSE:APHA) stock has lost nearly 40% of its value. From a broad perspective, the selling in Aphria stock might make some sense.



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After all, U.S. stocks on the whole have plunged ever since the coronavirus from China began to spread in late January. Cannabis plays like APHA have been particularly hard hit. The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) hit an all-time low just last week, and is off 17% year-to-date.

Investors could point to Aphria’s second-quarter earnings as a catalyst. In that release, the company cut full-year guidance. A lowered outlook in a challenged sector often leads to a selloff. Aphria’s debt, incurred in acquiring businesses in Europe and South America, may have added to the pressure.

But looking more closely at Aphria stock, the simple explanations don’t hold up. At the least, they don’t explain the size of the decline in such a short period of time. And so, it simply seems like APHA stock has fallen too far — and should be in store for a nice bounce when and if markets, and the sector, can recover.

Markets Plunge

There’s been something close to panic selling in U.S. stocks since late January, and particularly in the last few sessions. The S&P 500 lost 11% of its value last week alone, its worst performance since the beginning of the financial crisis in 2008.

As in 2008, there’s been a “flight to safety.” The yield on the 10-year Treasury bond reached an all-time low of 1.036% overnight. And cannabis stocks, quite obviously, are not safe investments.

In that kind of environment, some level of selling in Aphria stock is to be expected. But, again, it’s the pace of the selling that is a surprise, particularly relative to other investments.

The 39% decline in APHA since Jan. 23 dwarfs the 7% fall in the S&P 500. The MJ ETF admittedly is down 17% — but that’s still less than half as far as Aphria stock has fallen.

In a sinking market, it makes sense that APHA too would sink. But it’s much less clear why the stock would underperform other cannabis names. In that context, Monday’s trading is even stranger. The S&P 500 closed up 4.6%. The MJ ETF gained 2.2%. Yet APHA closed down another 4%.

APHA Underperforms

To be sure, I’m likely a bit biased: I’ve called Aphria stock my pick in cannabis, even as I’ve also written that the sector as a whole could see more selling. But that potential bias aside, the relative weakness in APHA still is somewhat surprising.

What’s particularly noteworthy is that APHA has done worse than even Aurora Cannabis (NYSE:ACB). Whatever an investor thinks of ACB stock — and I’m not optimistic — there’s little question that it’s the highest-risk of the major cannabis stocks. That company has significant balance sheet concerns, while its plunging stock price pressures its ability to raise additional capital.

Yet while APHA has dropped 39% since late January, ACB has dropped just 34% (it, too, rallied on Monday). That stretch includes an ugly second-quarter earnings report from Aurora, which featured nearly 1 billion CAD in non-cash write-offs. That report looked even worse in contrast with an impressive quarter from fellow major Canopy Growth (NYSE:CGC), who increased sales in a tough environment.

There’s really no reason why Aphria stock should have underperformed Aurora. Aphria has incurred quite a bit of debt — but it has a greater amount of cash. With the company already delivering EBITDA (earnings before interest, taxes, depreciation and amortization) profitability, its cash burn should be manageable.

Aurora has a material risk of going bankrupt in the coming years. In a panic-selling environment, investors usually run from those types of names. Aphria has a much more modest risk but investors have been sprinting away even faster.

Did Earnings Undercut Aphria Stock?

It’s possible that January’s earnings report has had an impact on Aphria stock. But if so, that impact was delayed.

APHA stock did decline 8.4% after the release and the guidance cut. But that decline came on Jan.14, and came the day after the stock rose 10% ahead of earnings. By Jan. 23, Aphria stock had easily regained post-earnings losses. It clearly was headed in the right direction, having gained over 10% year-to-date.

And it’s not as if the earnings report was a disaster. The lowered outlook was not much of a surprise in an industry struggling with regulatory backlogs which have slowed the rollout of “Cannabis 2.0” products. Aphria still is guiding for EBITDA profitability and strong revenue growth this year. Its opportunities are delayed, not lost.

Meanwhile, the news since earnings actually seems relatively positive for Aphria.

Good News Since

At the end of January, Aphria closed a 100 million CAD investment with an unnamed investor. That investor paid 7.12 CAD (at the time, $5.38) per unit, which included one share and one-half of a warrant at 9.26 CAD ($7.00).

A Black-Scholes calculation estimates the value of that warrant at about $1.38 — meaning the investor paid, net, about $4 per share for APHA stock. That stock trades at $3.50 barely a month later.

In other words, investors can buy APHA now at a cheaper price than an experienced investor with deep knowledge of the business did just five weeks ago. And the offering added more cash to Aphria’s balance sheet, allowing it to spend on marketing and research and development, repay debt, or look to acquire additional assets on the cheap from struggling rivals.

That cash should be in good hands. It was announced along with Q2 earnings that well-regarded chief executive officer Irwin Simon is joining the company on a permanent basis after holding his title on an interim basis. As rivals like Canopy and Aurora look to firm up their own top spots, Aphria has a proven executive — Simon previously ran Hain Celestial (NASDAQ:HAIN) — as its CEO.

Meanwhile, results should improve going forward. One of the reasons cited for the guidance cut on the second-quarter earnings call was a temporary ban on vapes in the province of Alberta. The province reportedly is planning to lift that ban shortly.

An Unjustified Sell-Off?

And so, this fade in Aphria stock simply seems to have gone too far. To be sure, that doesn’t necessarily mean APHA is a buying opportunity.

After all, it’s possible markets can fall further, with Monday’s 4%-plus gains in major indices appearing like a “dead cat bounce” given Tuesday’s steep declines. Cannabis stocks remain falling knives: many investors have thought APHA and other plays were “too cheap” at many points over the past year. Nearly all are in the red.

But the decline in APHA only firms my conviction that it’s the best play in the sector, however that sector performs in the near term. And even for investors (myself included) still somewhat skeptical toward the industry, there’s a strong case.

The company has good management. Its branded products are in excellent shape, according to at least one analyst. There’s plenty of cash on the balance sheet to ride out recent volatility in the market and in the industry.

On a relative basis, meanwhile, this selloff has gone too far. If the sector keeps dropping, perhaps that only means Aphria stock doesn’t do quite as poorly as other cannabis stocks. But at the very least, investors should believe that APHA’s underperformance has to come to an end.

Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.