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Is Aphria (TSX:APHA) Stock a Buy Heading Into Earnings?

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Aphria (TSX:APHA)(NYSE:APHA) is expected to release its latest quarterly results on Thursday after the markets close. It’s going to be a big test for an industry that’s recently been shaken by the CannTrust scandal. Heading into this week, Aphria had already lost around 20% of its value over the course of the last month, and there’s been no negative press surrounding the company during that time.

It’s an example of how heavily cannabis stocks can be impacted by their peers. There is a lot of apprehension from investors lately, and it’s certainly been evident in all the selling that’s taken place of not only Aphria but other cannabis stocks as well. However, that also means there could be a lot of upside for Aphria’s share price if the company reports a strong earnings result this week.

In its most recent quarterly report, Aphria struggled with rising costs and writedowns that sent the stock into a big sell-off soon afterward. And the recent negativity in the industry has only made things worse for its share price.

However, if Aphria is able to show some improvement this quarter in not just sales but its bottom line, that could help win the trust of investors. If investors can be convinced that the company is being run well, there’s more of a likelihood that they’ll trust it, which today might be the biggest determinant in whether a cannabis stock will be able to rise in value.

Aphria, unfortunately, has had a history of walking a tight line when it comes to regulations, and that reputation might not be doing the company any favours today. But with a change in leadership, Aphria has done a good job of keeping its name out of the press for the wrong reasons, and so there’s the possibility that if it can demonstrate a more financially sound business, it could generate some excitement around the stock once again.

At a minimum, investors will be looking for sales to show significant growth during the quarter, likely at least double from what they were a year ago. However, after posting a big loss of more than $100 million last quarter, investors will be looking for a big improvement there as well. Failing that, there’s a possibility that Aphria could go on even more of a decline. While it may not reach its 52-week low of less than $5 per share, there’s still ample room for Aphria’s stock to fall from where it is today.

Bottom line

There’s never been a riskier time to invest in cannabis stocks than right now. Even with a good performance this quarter, Aphria’s stock might still not see a lot of buying. While it may help stop the bleeding and perhaps even generate a rally, until the concerns in the industry subside and investors have more confidence in cannabis companies, we’ll likely continue to see a lot of bearish activity.

For that reason, I wouldn’t expect that Aphria will be a good buy today. A lot of things would have to go right for the stock to have a good quarter, meanwhile, any positivity would still be weighed down by concerns investors have for the industry as a whole.

Investors may be better off waiting on the sidelines for now before buying Aphria or any other cannabis stock.

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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 David Jagielski has no position in any of the stocks mentioned.

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