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Why Aphria Inc. (TSX:APH) May Be a Better Marijuana Bet Than Aurora Cannabis Inc. (TSX:ACB) or Canopy Growth Corp. (TSX:WEED)

A 73% return over the past year is outstanding by anyone’s standards. But when it comes to Aphria (TSX:APH), the return is measly and pales in comparison to the returns clocked in by its peers of late. Over the past year, Aurora Cannabis (TSX:ACB) delivered 160%, while Canopy Growth (TSX:WEED)(NYSE:CGC) has surged 272%.

These incredible past-year returns suggest that the race for the title of Canada’s favourite marijuana company is between two rivals: Canopy and Aurora. But I think investors would be foolish (that’s a lower-case ‘f’) to rule out Aphria, as it could potentially leapfrog one of, if not both, its peers in the post-legalization environment.

Back in January, I’d noted that Aphria was my least-favourite TSX-traded marijuana stock, right before shares crashed 56% over a few months.

Talk about impeccable timing!

While all marijuana stocks corrected after my strong sell recommendation was published, one can’t help but notice that Aphria has taken, by far, the biggest hit to the chin compared to the likes of Canopy, which is just down 20% for all-time highs at the time of writing.

Why did I (and a majority of other investors) count Aphria out of the race?

At the time, Aphria had U.S. assets and an apparent plan to pull the trigger on more deals south of the border. Things were going well, until it was found out that Aphria wasn’t complying with U.S. federal law and was at risk of being delisted from the TSX.

I’d noted that Aphria would likely hastily dispose of its assets to remain as a TSX-traded company, and that’s indeed what ended up happening just over a month later.

Fortunately for Aphria, it didn’t need to liquidate its assets for below their real worth, since anything marijuana-related was a hot commodity at the time. Aphria divested its Arizona-based Copperstate Farms assets for $20 million, as it moved towards complying with the requirements to remain listed on the TSX.

Shortly after, Aphria began pulling the trigger on absurdly expensive acquisitions with Broken Coast Cannabis Inc. and Nuuvera Inc. bought for $230 million and $826 million, respectively, at a time when the entire industry was at bubbly multiples. The company pretty much paid a premium on top of a premium and ended up spending a dollar to get a dime, which is not a great value-creation move.

There’s no question that Aphria was headed in the right direction with its industry-leading efficiency numbers at the time. Unfortunately, management shot themselves in the foot with poorly timed decisions, which ultimately allowed Canopy to widen its market cap gap.

Why Aphria is no longer my “least-favourite” marijuana stock

Today, Aphria stock has been punished, and then some. In spite of the questionable moves made by management on the M&A front, Aphria remains focused on operational efficiency and driving down the cost per gram of marijuana.

In a commoditized environment that regulators are hoping for, Aphria will excel as a producer with some of the lowest production costs in the industry. And while every marijuana producer may claim to have a focus on becoming the most efficient producer, Aphria walked the walk with quarterly reports that showed impressive per-gram costs that were worthy of a round of applause.

Aphria is also a heck of a lot more profitable than its peers and hasn’t tested the boundaries of the rules to the same extent as Aurora and Canopy, which have been sponsoring events in spite of regulators expressing their disapproval for such.

If regulators step up their enforcement and create an environment where marijuana is nothing more than a commodity, Aphria, I believe, will come out on top.

Ontario’s more relaxed tone with regards to private pot shops may allow for subtle product differentiation. And with such distinction, marijuana will become more than just a commodity.

If that’s the case, Aphria could continue to lose ground to Canopy, which I believe has the best portfolio of brands by far and will do everything in its power to differentiate itself from the pack.

Stay hungry. Stay Foolish.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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