Well, it seems to be that time of the year when the shorts come out of the woodwork. It seems every December the shorts look for the year’s hottest sector and biggest movers hoping that the New Year will bring about a correction and profit taking. The target this year is cannabis stocks and in particular, Aphria Inc (NYSE:APHA).
This year’s attack took place at the Kase Learning Short Selling Conference, where short sellers Gabriel Grego of Quintessential Capital Management and Nate Anderson of Hindenburg Research issued a scathing report. From the Seeking Alpha article:
- Aphria’s recent C$280m Latin American acquisitions raise major red flags. Our extensive on-the-ground research shows that the transactions appear to be largely worthless.
- Example: The official registered office of Aphria’s C$145m Jamaican acquisition is an abandoned building that was sold off by the bank earlier this year.
- Example: Aphria’s C$50m Argentine acquisition publicly boasted sales of US$11m in 2017. A worker at the company, however, affirmed that 2017 revenue was only US$430k.
- Documents show that Aphria insiders were likely undisclosed beneficiaries of the deals. We estimate Aphria has diverted upwards of C$700m via such transactions, or ~50% of Aphria’s total net assets.
- Aphria consistently generates negative cash, and its cannabis seems to be of low quality. Interviews with sources describe facilities infested with bugs, stricken with mold, and having failed audit inspections.
Now these are very serious allegations. However, we see some very serious holes in their critique. For one, the overseas operations are overall a very small piece of the pie for Aphria. That’s why we are focused on their Canadian operations. Second, Aphria’s cannabis is certainly not low-quality. The report is relying on a disgruntled employee for validation. Investors can simply go to Lift and read real-reviews of the products Aphria sells. Its products have been reviewed over 4600 times and Aphria gets a four-star rating.
Now I didn’t have to go to Latin America or Jamaica to get a look at Aphria’s financials. I simply went to Yahoo! Finance and it’s clear to me that there’s serious value to the company. Here are a few highlights:
- Only a $1.5B market cap
- A P/E of 46 compared to Canopy Growth Corp (NYSE:CGC) losing money
- A price/book of only 1.3
- Profit margin of 80%
- $236 million in cash versus just $42 million in debt
Most of the short thesis rests on possible self-dealing with an Andy DeFrancesco and a host of characters that he has done business with and that have run into regulatory issues in the US and Canada. While we are not going to agree or defend Mr. DeFrancesco, the short-sellers did not implicate CEO Vic Neufeld or senior management as being involved here. If the focus was on the CEO, we would be much more concerned.
While Aphria could see more selling pressure over any uncertainty, we believe that the shortseller’s report is more smoke than fire. We did not see a smoking gun that would make someone panic sell their stock. That is what the shortsellers want to happen. Notice that the shortsellers did not even mention Aphria’s expansion in Germany. There, the company is building one of the biggest state-of-the-art GMP certified cannabis vaults in Bad Bramstedt, northern Germany, with a storage capacity of 5,000 kilograms. Aphria also just announced its proposed acquisition of CC Pharma GmbH (“CC Pharma“), a leading distributor of pharmaceutical products to more than 13,000 pharmacies in Germany with over €200 million in annual revenue.
Overall, we believe the long-term story is intact for Aphria and the current selloff is a “buy the dip” opportunity. However, patience is warranted until the market shakes out and Aphria responds to each of the allegations.
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Disclosure: We have no position in APHA at the time of this writing, but we may initiate a position within 72 hours of publication. We have not been compensated for this article.
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