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Is Aphria a Buy?

Aphria (NYSE: APHA) listed its shares on the New York Stock Exchange in 2018. At long last, it began selling products in the Canadian recreational marijuana market, and the company expanded internationally. Aphria's share price, however, still plunged more than 60% last year.

But 2019 is already off to a good start, with the stock making a comeback. The Canadian marijuana producer posted solid results in its fiscal year 2019 second-quarter update. Is Aphria now a buy?

Image source: Getty Images.

Potential risks

The decision to buy any stock or not comes down to the risk-reward proposition. Let's start by looking at the potential risks that Aphria faces.

Probably the biggest risk that's been on investors' minds lately relates to short-sellers' allegations that Aphria significantly overpaid for the LATAM Holdings acquisition and profited key insiders in the process. Aphria's board of directors established a special committee to review those allegations. This committee is made up of independent directors who joined the board after the LATAM transaction was completed. So far, however, the special committee hasn't announced its findings.

The dark cloud hanging over Aphria related to the short-sellers' allegations could also prevent the company from picking up a big partner. Several of its peers have already lined up deals with major companies outside of the cannabis industry. Failing to secure a big partner would put Aphria at a competitive disadvantage in the global marijuana market.

Aphria also continues to eat into its cash stockpile. It's possible that the company could have to issue more shares to raise cash in the not-too-distant future. Investors face a real threat of dilution in the value of their existing shares resulting from another stock offering.

Another problem is that Aphria can't sell products that it can't make. The company hoped to receive approvals for its additional capacity at the Aphria One and Aphria Diamond facilities. However, Health Canada has a tremendous backlog. There's no guarantee that Aphria will get a green light anytime soon. If not, the company won't achieve the sales growth that it's hoping to generate.

Even though Aphria stock is much lower than it was a year ago, it's still not cheap. A tremendous level of anticipated growth is baked into Aphria's share price. Anything that gets in the way of the company's growth would make a huge negative impact on Aphria stock.

Potential rewards

While there certainly are several real risks for Aphria, the stock holds the potential to deliver big rewards to patient investors as well. Starting on Aphria's home front, the Canadian recreational marijuana market is just getting started. Naysayers predicting weaker-than-expected demand for recreational marijuana have been proven wrong so far.

Aphria lined up supply agreements with all of Canada's provinces plus the Yukon territory. In addition, the company partnered with North America's largest wine and spirits distributor, Southern Glazer's, to distribute recreational cannabis products throughout Canada.

Another big market hasn't even opened yet in Canada. The country still has to finalize regulations for cannabis edibles and concentrates. Aphria plans to enter this market as soon as it can and has already started developing its strategy for cannabis-infused products.

Aphria should provide even greater rewards for investors from its international efforts. The company recently completed the acquisition of CC Pharma, a leading pharmaceutical distributor in Europe. This deal improves Aphria's position in the important Germany medical cannabis market as well as other European countries that have legalized medical cannabis.

And while there have been criticisms about Aphria's LATAM Holdings acquisition, the company has significant opportunities in Latin America and the Caribbean. Four medical marijuana markets in the region look especially attractive: Argentina, Colombia, Paraguay, and Jamaica.

Aphria had to divest its investments in U.S. operations to retain its stock listing on the Toronto Stock Exchange. But the recent U.S. legalization of hemp creates an opportunity for Aphria to jump back into the U.S. Also, efforts to revise federal laws in the U.S. to allow states to enforce their own marijuana laws appear to have a greater chance of success than ever before. It these efforts are indeed successful, Aphria would almost certainly expand into the U.S. again.

Opinions vary over just how big the global marijuana market will be. However, it seems likely that the total opportunity will easily top $100 billion over the next decade. Aphria ranks No. 3 in projected production capacity and should be in a good position to claim a significant share of the global market. Capturing even a small slice of a market that big would make Aphria a bargain at its current price.

To buy or not to buy?

So is Aphria a stock to buy right now? I think it is.

My prediction is that the review by Aphria's special committee won't find anything overly damaging to the company. I expect that Aphria will become a top partner candidate for a big company outside of the cannabis industry once the air is cleared over the short-sellers' allegations.

It also will help that Aphria has already taken steps to improve its image. Aphria brought in an outside chairman of the board, Irwin Simon. CEO Vic Neufeld and co-founder Cole Cacciavillani are stepping down from their executive positions.

I'm not worried about Aphria's approvals of its additional growing space, either. It's just a matter of time before Health Canada reviews Aphria's facilities. Delays could impact Aphria's sales -- but only temporarily.

Aphria could have to raise cash by issuing new shares. Again, though, I think this is a short-term problem that will be resolved within the next couple of years as Aphria transitions to sustained profitability.

Over the long term, my view is that Aphria will compete in cannabis markets across the world -- including, by the way, the U.S. I expect that the global opportunity will indeed reach $100 billion annually and perhaps a lot more, with Aphria grabbing around 5% of the total market.

I think the potential risks and rewards for Aphria are real. But I think the potential rewards far outweigh the risks, making Aphria one of the more attractive marijuana stocks on the market right now.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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