Back in mid-April I discussed the possibility of a return to volatility for the cannabis sector. Many top cannabis stocks had a great start to 2019 in lock step with the broader TSX. However, analysts began to sound the alarm in early spring ahead of a flurry of earnings releases. Sales had unexpectedly weakened in January over December 2018, which was a troubling statistic so soon after recreational legalization.
Aphria (TSX:APHA)(NYSE:APHA) is one of the top producers in Canada. The company projects that it will be the third-largest grower in Canada based on its peak production forecast of 255,000 kilograms per year. It emerged on the scene as one of the top players, but it has been hit with bad news over the past six months. This started with a short report in December 2018 that alleged that its Latin American acquisitions were basically worthless.
Aphria defended its assets but swallowed a bitter pill in its third-quarter fiscal 2019 earnings, reporting a net loss of $108.2 million. The company revealed a $50 million non-cash impairment charge to the carrying value of its Latin American assets. This appeared to vindicate the short seller, but Aphria continues to stand its ground over its holdings.
The higher-than-expected net loss overshadowed what was a decent quarter in terms of total revenue. Aphria reported revenues of $73.6 million, up 240% from the prior year. Kilograms sold fell from the previous quarter, which management said was due to “temporary packaging and distribution challenges.” Supply shortages due to new growing techniques also played a role in the pullback.
According to CEO Irwin Simon, Aphria has seemingly committed to righting the ship domestically before looking to the U.S. Simon has been tasked with righting the ship after Aphria has taken hits over potential conflicts of interest. Aphria saw another reshuffle in mid-May as the company announced the resignation of President Jakob Ripshtein effective June 7. The company did not specify what led to the resignation, however.
Since the December 2018 short report, Aphria has seen the departure of former CEO Vic Neufeld and co-founders Cole Cacciavillani and John Cervini. Shareholders will be hoping for most stability from upper management going forward. The company has endured a difficult six months, but is still flush with cash and well positioned to improve its domestic output.
Shares of Aphria have now dropped 35.2% over the past three months as of close on May 23; the stock is still up 9.8% in 2019 so far. Broader volatility in North American markets is dangerous for the cannabis sector, which in its short history has usually succumbed to larger sell-offs.
Aphria stock is now trading at the low end of its 52-week range. This is the first time that the stock has plunged into the single digits since January. Shares had an RSI of 30 as of close on May 23, putting it just outside of technically oversold territory. Technical value aside, Aphria is just too dangerous to bet on right now. The company needs to put together a good stretch to renew faith before investors should consider re-entry in a volatile market.
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.