Taking Stock by Malcolm Berko

Aphria May Be Pick of the Cannabis Industry

Dear Mr. Berko: I've invested off and on in about a dozen pot stocks and lost money each time. I've been looking at Aphria for three months and can't make up my mind. What do you think? -- H.L., Wilmington, North Carolina

Dear H.L.: I don't know enough about the cannabis industry to pick a winning pot stock from the many hundreds trading between pennies and a few dollars. These issues are pushed by bucket shop brokers whose commissions are 50% of what the stock sells for. Buyout and merger gossip is so capricious that many pot stocks trade up or down by 50% on any buyout rumor. In fact, there's a rumor Boeing may take over a pot company and pass out product to flyers on its 737 MAX.

But Ian Gendler at Value Line thinks he has a handle on Aphria (APHA-$7.75), which began trading on the Big Board last year, just before Thanksgiving. Homeported in Canada, APHA, via partners and distributors, cultivates, processes and distributes quality cannabis products to users in several countries. Its products are professionally and carefully cultivated in a high-tech, gleaming, 300,000-square-foot pot farm in Ontario. And unlike most penny pot stocks held together by flimsy business models and dog patch yokel CEOs in bib overalls, APHA may be one of the top guns in this industry. Its officers and directors are serious businessmen, it elects a legitimate board of directors, and it uses a respected accounting firm.

This year, APHA expects to put about $150 million of consistently high-class product on the market (many pot firms produce varying and undependable product quality), and should earn a clean dime a share or total net income of $25 million. That's a 16%-plus net profit margin. Gendler reckons APHA can increase revenues in 2020 to $555 million and report a profit of $0.30 per share or a total net profit of $90 million. And a billion in revenues may be just a few years off.

According to the United Nations (which is an oxymoron), the global market for pot is currently $175 billion. There are over 200 million adults (over 21) using marijuana that's cultivated in 130 countries, and it is the most widely illicitly produced drug on the planet. In June of 2018, the U.N. declared cannabis an effective and "relatively safe drug." And in the coming years it's hoped that most countries will legalize pot and then we can all get a bong.

I doubt APHA is going to knock your socks off and run to $30 or $40 a share this year or next. Green Growth Brands (GGBXF-$3.50) made a short run at Aphria last year at $8.75 a share and was quickly turned down. Still, Aphria has a strong 2019 cash flow of $0.15 a share and possibly $0.35 in 2020. Book value of $6.25 this year could top $6.90 next year, while return on total equity and total capital could triple to 4.5% in 2020 from 1.5% last year.

Long-term debt is expected to increase from $50 million to $60 million in 2020, which is about 3% of capitalization. However, management recently completed raising $300 million with a 5.25% convertible bond. Meanwhile, I'm surprised that Quaker Impact Growth Fund and Quaker Small/Mid Cap own 80,000 shares, and pleased to see that S&P rates APHA a hold.

If you're comfortable owning APHA, then pull the trigger. The longer you sit on the pot, the more difficult it'll be to make a decision. Either do it or don't. The IPO price was $10 a share last November, and since then APHA has enjoyed a price range between $3.50 and $16.85. The only way to own this stock is as a long-term investor. I suspect in the next few years APHA could be a $30 stock.

(Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.)