Aphria Inc. (TSX:APH) Stock Is the Top Cannabis Play After Legalization

Aphria Inc. (TSX:APH) is the third-largest cannabis producer in Canada, but its stock may offer the best value of the top three today.

Gold medal

Image source: Getty Images.

Many of the top cannabis stocks suffered a retreat on the first day of trading after recreational cannabis was made legal in Canada on October 17. A Canopy Growth-owned store was the first to make an over-the-counter sale of legal weed shortly after midnight. Yesterday, I’d discussed why Canopy was in the strongest position of the top producers as legalization kicks off. Canopy is an attractive play, but it is not my top option today.

There was one big name that broke the trend of retreating prices when markets closed on the same day.

Aphria (TSX:APH) stock climbed 3.8% on October 17. Shares have now surged 86% over the past three months. Back in late August, I’d discussed why Aphria should be one of the top targets for investors ahead of the legalization date. The case for owning Aphria has only strengthened in recent weeks. It is my top cannabis stock to scoop up post-legalization.

Aphria released its fiscal 2019 first-quarter results on October 12. The company reported a 35% year-over-year increase in kilograms sold to 1,778.2. Revenue rose 117% year over year to $13.2 million, while cash costs to produce cannabis per gram rose to $1.30 compared to $0.95 in the prior year. This also represented an 11% quarter-over-quarter increase in revenue.

The company’s production capacity is set to skyrocket over the next year. Aphria estimates that it will increase its total annual cannabis output to 255,000 kilograms by May 2019. Increasing production capacity will be critical especially as producers struggle to meet demand in the early months of the roll out. The C.D. Howe Institute released a report that predicted legal cannabis supply would only be able to meet between 30% and 60% of demand in late 2018 and the first half of 2019.

Aphria has secured supply agreements with every single Canadian province. In the second quarter, the company also announced that it had divested of all U.S. cannabis assets at the quarter’s end. This does not mean that it does not have huge growth potential south of the border. An omnibus farm bill in the United States could pave the way for cannabidiol to be sold across the country. Aphria is flush with cash — an estimated $360 million in working capital as of the end of fiscal 2019 Q1 — and could move quickly to re-up its footprint in this area.

Many Canadian producers have made a push into international markets. Aphria’s effort has been one of the most promising so far. Aphria has acquired companies in Columbia, Argentina, and Jamaica and a right of first offer of refusal in Brazil, one of the largest global markets. It has a well-established footprint in Australia with its partner Althea and has entered a joint venture with South Africa-based Verve Group to form CannInvest Africa Ltd. This could open supply chains for Aphria to the entire African continent going forward.

Shares of Aphria have increased 3.7% in 2018 so far. Its performance has been muted in comparison to the other top producers. The stock comes at an attractive value for investors at this stage.

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 Ambrose O'Callaghan has no position in any of the stocks mentioned.

More on Investing

Retirement plan
Dividend Stocks

$100,000 in Savings and These 3 Stocks Could Help You Retire in 17 Years 

Do you have $100,000 in savings? Now is an opportune time to invest your savings in these stocks and get…

Read more »

investment research
Tech Stocks

2 Hot Stocks to Buy and Hold Until You Retire

Are you looking for stocks to buy and hold until you retire? Here are two top picks!

Read more »

woman retiree on computer
Dividend Stocks

2 Dividend Stocks That Will Pay You for Years and Years

Top TSX dividend stocks are starting to look oversold.

Read more »

Retirees sip their morning coffee outside.

TFSA: How to Create $500 in Income Each Month for Retirement

The TFSA is a great place to create a source of modest monthly income from.

Read more »

potted green plant grows up in arrow shape

2 Growth Stocks to Buy With $1,000 Right Now

Shopify (TSX:SHOP) stock is just one growth stock to buy after last week's market plunge!

Read more »

Stocks for Beginners

WSP Stock at 52-Week Highs, But More to Come

WSP (TSX:WSP) stock continues to surge past 52-week highs, but there could certainly be more to come for this great…

Read more »

tsx today
Tech Stocks

TSX Today: What to Watch for in Stocks on Wednesday, September 27

An overnight bullish movement in oil and gas prices could lift TSX energy stocks at the open today.

Read more »

TFSA and coins
Dividend Stocks

2023 TFSA Contribution Time: 2 Dividend Stocks to Buy With $6,500

Are you interested in using some of your 2023 TFSA contribution room? Here are two dividend stocks to buy with…

Read more »