Aphria Inc. (NYSE: APHA) reported its fiscal fourth-quarter earnings last week, and the company exceeded all expectations.
And it beat those estimates from underneath a cloud of short sellers' spurious innuendo, to boot.
After a quarter of overall decline in Canadian cannabis revenue, Aphria saw an increase of 85% - that's 85% sequentially and not year over year. The company also turned earnings before interest, tax, depreciation, and amortization (EBITDA) positive - albeit after adjustments and with help from a European pharmaceutical distribution business the company owns.
And to top it off, management's optimistic about the future.
So any investor could look at Aphria's reporting and conclude it had a great quarter. And they'd be dead on.
What might not be so obvious at first glance is that this company just showed investors how it was going to take the cannabis sector to the next level.
There's much more here than meets the eye...
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Aphria Is Speeding in the Right Direction
From this earnings report, it's painfully clear that the Canadian producers were nowhere near ready for October 2018 legalization.
Folks got caught with their britches down, frankly, and the blame for the ongoing cannabis shortage in Canada has been directed at a lot of targets - producers, regulators, and retailers.
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Each probably deserves some blame, and in particular, the huge delays in Ontario retail stores hurt the industry. But it's clear now that the producers may have been a little too confident in how much marijuana they could produce.
As companies like Aphria get better at growing cannabis, they will get better at meeting demand.
Aphria shipped more than double the amount of cannabis this quarter than it did just three months ago, and CEO Irwin Simon attributed the success to recent changes the company made in how it produces cannabis.
It's all in advance of something we'll call "Canada 2.0." And that's coming in December.
The Market North of the Border Will Expand Massively
Come December, Canada should be allowing the sale of "vapes" (cannabis concentrates and extracts that can be vaporized, as opposed to smoked) and edible cannabis products.
In an interview after the call, Aphria CEO Simon claimed that there was already a $1 billion market for vapes in Canada. Trouble is, it's an illicit market at the moment.
Simon actually described that black market as his biggest competitor.
So when legal industry begins to offer vapes and edibles as legal products, we're almost assured of significant sales increases in December and the first quarter of 2020. All the while, these companies will be growing adequate supplies of cannabis.
Marijuana Stock Prices Are Ready to Rocket
The weed market wants to go up. But it has to climb a classic "wall of worry" before it can do that. In relatively short order, we've seen the scandal at CannTrust, and a U.S. Food & Drug Administration warning letter land an American cannabidiol (CBD) producer. We've even seen Canopy Growth Corp. (NYSE: CGC) - a heavyweight pot stock - fire CEO Bruce Linton.
Aphria itself was under attack not long ago, when some short-sellers made serious - but ultimately disproven - allegations in a bid to drive the share price their way. (Those bear raiders are now wishing they hadn't; short Aphria positions are closing left and right!)
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These are relatively minor problems - especially when you compare them to the derivatives double-dealing at "too big to fail" American banks, say, or the Volkswagen emissions scandal. It's just that the cannabis sector is so new, these few issues have been enough to scare investors off.
But Aphria's results remind us all why we are invested in cannabis...
No one else grows revenue 85% in a single quarter.
Aphria's move of more than 30% following the earnings beat is impressive, but other rallies have been equally fast. The market increased by 80% in a month after Constellation Brands Inc. (NYSE: STZ) invested in Canopy.
When cannabis stocks recover, it will happen very quickly. Make sure you're in position to profit.
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About the Author
Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.
During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.
After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies. He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.