Aphria Inc. (TSX:APHA): Is the Stock Still Oversold?

Aphria Inc. (TSX:APHA)(NYSE:APHA) has recovered some lost ground in recent days. Are more gains on the way.

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Aphria (TSX:APHA)(NYSE:APHA) is up 60% in the past week, and investors who missed the bottom of the recent sell-off in one of Canada’s top marijuana stocks are wondering if more gains could be on the way.

Let’s take a look at the current situation to see if Aphria deserves to be on your buy list right now.

Volatile times

Pot stocks have had a rough run since the launch of the Canadian recreational market. Investors sent the share prices of the country’s marijuana producers soaring in anticipation of the opening of what many analysts have identified as a market worth at least $5 billion per year.

Unfortunately, supply shortages from producers and delivery delays caused by rotating Canada Post strikes resulted in a disappointing start of the promising new market. This resulted in some steep profit taking that sent many of Canada’s cannabis stocks toward 2018 lows.

Aphria faced operational challenges leading up to the recreational launch, including difficulties finding the employees needed for production and cultivation, but has since filled positions and is implementing new automation in the facilities that should reduce costs and speed up the entire process from planting to final production of the marijuana.

The company also found itself in the headlines when a short-seller report came out December 3 claiming Aphria had overpaid for assets it recently acquired in the Caribbean and in Latin America. Quintessential Capital Management and Hindenburg Research, which revealed their short positions in Aphria, suggested the businesses purchased in Jamaica, Argentina, and Colombia might be worth much less than what Aphria paid.

As a result of the report, some analysts reduced their price targets on Aphria, citing potential credibility challenges for the company. Concerns also emerged regarding Aphria’s attractiveness as a partner for global beverage or tobacco players. Interestingly, Altria announced a $2.4 billion investment in Cronos Group just a few days after the short-seller report came out on Aphria. Altria is taking a 45% position in Cronos Group with an option to increase the stake.

Should you buy?

Aphria refutes the claims made in the short-seller report, and it appears the market is siding with the company, given the sharp rebound in the stock from the closing low of $5 it hit on December 5. At the time of writing, Aphria trades for $8.20 per share. The stock was above $21 in September.

If you are of the opinion the Canadian and global market for medical and recreational cannabis is set to grow as anticipated, Aphria might be an attractive contrarian pick at the current price. The company’s market valuation is down to $2 billion, which could make it an attractive takeover target for one of the larger competitors.

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 Andrew Walker has no position in any stock mentioned.

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