Two Charts Show Why Aphria Is the Top Weed Stock for 2017

Aphria StockIs Aphria Stock the Top Marijuana Stock?

You’ve seen unicorns, haven’t you? No, not the mythical horse with a horn on its head. I’m talking about the Silicon Valley tech startups that have scored billion-dollar valuations even before going public.

But have you seen narwhals?, the unicorns of the North? They are the billion-dollar companies of Canada. Of particular note is one odd company, the first-ever billion-dollar marijuana company. Yes, marijuana stocks are an actual thing in the investing world. And everyone seems to be out hunting for the top marijuana stocks these days. I’ve hunted down my top pick: Aphria Inc (TSE:APH, CVE:APH).

But first, in case you’ve missed this investment idea, let me break it down for you.

Canada is set to become the second country in the world to legalize pot, after Uruguay. The groundbreaking decision from the federal government is expected to be realized by Canada Day (July 1) next year.

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Here’s what happens next.

Once recreational marijuana is legal, the drug’s illegal underground market will breathe its last breath. This can only mean one thing. The money that goes to drug cartels gets diverted to legal marijuana businesses. Plus, the demand for recreational marijuana also goes up in a free environment. As a consequence, legal marijuana growers and sellers make a killing. It’s very simple. No rocket science here.

So naturally, many bought the rumor before Canada’s government confirmed the news of legalization, and started racking up on marijuana stocks. In the last six months, Canadian marijuana stock prices skyrocketed as they became the Holy Grail for investors looking to make quick fortunes.

This brings us full circle to the first unicorn or, so to say, the narwhal in Canada’s marijuana industry. Canopy Growth Corp (TSE:WEED, CVE:CGC), hit a billion-dollar market cap for being the most high-in-demand marijuana stock—not just for having a catchy ticker symbol, but for being the biggest marijuana grower in Canada.

It doesn’t take a highly qualified financial analyst to see that WEED stock is now grossly overvalued because speculators, right and left, are in on it. So, of course, some eyes are now shifting to the next candidate in line.

Aphria Stock Analysis

Aphria is now the front-runner in the race to hit the billion-dollar valuation mark. Aphria’s claim to fame is being one of Canada’s lowest-cost producers of marijuana, and one of the only four marijuana companies in Canada that has gone international.

While there are a handful of other Canadian marijuana stocks out there, this one deserves a special mention for another reason. APH stock is one of the very few that managed to move to the Toronto Stock Exchange (TSX) over a month ago.

Yes, APH stock graduated from TSX Ventures to TSX in February to join the league of top cannabis producers. Why does it matter? Because only the best of the bunch gets listed on the TSX, after meeting the the exchange’s stringent listing criteria. Most other marijuana stocks continue to be listed on the Canadian Stock Exchange (CSE) because they are are less liquid, less transparent, and—as a result—riskier.

There are more reasons why I’m bullish on Aphria stock over Canopy Growth stock.

For starters, Aphria, which grows its plants outdoors in greenhouses, saves on production costs when it compares itself to indoor growers like Canopy Growth, which have to be more capital-intensive. Here’s a snapshot of what Aphria’s costs look like compared to its peers.

Source: Latest Annual Report (*Competitors here mean indoor growers)
*Competitors mean indoor growers

(Source: “2016 Annual Report,” Aphria Inc, July 27, 2016)

Being a low-cost producer, Aphria can pull high margins and divert the savings to its bottom-line numbers. That’s exactly what you see in its latest quarterly report. Aphria’s gross margins are in excess of a whopping 78%. This is why it has managed to return a profit to its stockholders despite most marijuana stocks losing money today.

Secondly, its ongoing expansion makes APH stock a promising growth play. The company is now expanding to a massive one-million square feet of growing capacity, with an aim to deliver up to 70,000 kilograms in output.

On top of that, Aphria is expanding into the U.S. for the first time. The company has announced this month that it is making a foray into the U.S medical marijuana market, with Florida as its first stop and, later, other states. This further opens the doors for U.S. investors who otherwise may find Canadian companies risky.

Take note that Aphria, like its peer, Canopy Growth, has been consistently growing its sales figures. But, if you look at the revenue growth chart below, you’ll notice how Canopy Growth is seeing a steady decline in revenue growth, and Aphria’s growth has added sporadic spikes.

One can see how Aphria’s expansionary initiatives are lending to bursts of revenue growth every other quarter.

Data Source: Company Filings

(Data Source: Aphria Inc and Canopy Growth Corp company filings.)

I must point out that growth is usually volatile during a company’s early years of expansion. But the healthy sign is that Aphria is the first company of its kind that has managed to deliver consecutive quarters of profitability. So I’m not very skeptical in the long run.

Aphria Stock Prediction 2017

Aphria stock is now shooting for the moon, with a triple-digit jump in under six months. Its price chart is a stunning sight with a clear technical uptrend in play. The bullish MACD crosses (I’ve marked in green) reaffirm the bullish advance.

In case you’re new to technical analysis, you don’t have to know the nitty-gritty of technicals here. Just know the basic rule of thumb. The MACD line is a technical indicator (the black line at the bottom of the chart below). Every time it crosses the zero signal-line (the red line at the bottom of the chart) from below, a bullish signal develops. And, when it crosses the zero line from above, a bearish signal develops.

APH stock chart
Chart courtesy of StockCharts.com

But here’s a word of caution. I’m seeing an impending correction in APH stock in the short term. The uptrend in the stock price is now forming into a wedge. A rising wedge like this one is a classic indicator of bears waiting to strike. The latest MACD signal is also seemingly bearish.

Now, investors must understand that the rumors of pot legalization in Canada are nearly confirmed now, so that rumor is presumably priced into the stock. You need to ask yourself: can the stock go past current levels? The simple answer is, only if the company can deliver real growth in fundamentals.

So I’m thinking long-term, which is why I’m not too worried, because the company is headed in the right direction.

Final Word on Aphria Stock

I understand that quick triple-digit ascents to dizzying heights, like the ones that marijuana stocks have seen, make average value investors giddy. It’s also true that most marijuana stocks are being played by speculators and traders right now, and this has added to their volatility. But we cannot tar all marijuana stocks with the same brush.

Aphria and Canopy Growth are two of the top players in the Canadian marijuana industry but, for now, I’m rooting for Aphria stock to be the next narwhal of the marijuana industry.

In short, the company’s international growth and profitability point to more upside in the years to come, as Canada and, later, additional U.S. states move toward legalizing marijuana.