When Aphria (APHA) reported positive net income in its fiscal fourth-quarter 2019 results, it bucked the unprofitable trend seen among many marijuana stocks it competes against. Canopy Growth (CGC -0.20%) has lost more than $1.5 billion in the first two quarters of the year, while Tilray (TLRY) has reported five straight quarters of losses.

Speculative momentum within the cannabis market has certainly waned in recent months. As investors realized that these equities were trading at far beyond any sort of actual earnings and the losses continued, these premiums were no longer tolerated. 

Coming off a good fourth quarter

With new management clearly focused on proving the business has what it takes, Aphria made a strong case for itself last quarter. Revenue increased 969% year over year, and 75% quarter to quarter -- a result of the rapid sales gains from recreational markets. Pretty much every big name is putting up big revenue growth. What differentiated Aphria were its earnings. In a stark contrast to the losses under the previous CEO Vic Neufeld, Aphria posted net income of CA$15.76 million.

Jars of dried cannabis

Image source: Getty Images

Can the company do it again?

Looking ahead to Oct. 15, it looks unlikely Aphria can repeat its fiscal Q4.  The company made a concerted effort to show positive net income in the aftermath of losing its CEO and co-founder Cole Cacciavillani who resigned due to allegations that they purchased overvalued assets in order to benefit themselves indirectly.

With new CEO, Irwin Simon, the focus seems to back on the Canadian market and avoiding dilution. Aphria could surprise us, but don't bank on it. Many analysts are expecting a year-over-year decline on earnings, with growth in revenue -- a forecast matching the general trend for Canadian cannabis producers.

Overall, one quarter probably doesn't matter. When investing in a company like Aphria, look at the bigger picture. Investors would like to see a continued decrease in costs per gram of production (it was down to $2.35 of all-in costs at the end of the previous quarter), as well as signs that it is growing revenues at the same healthy rates as the first half of this year. A small loss is excusable as long as it's clear that the company is scaling toward more profits soon. 

An area of concern

It wasn't good to see the falling-out between Aphria and Aleafia Health (ALEAF 10.22%), a Canadian healthcare company involved in medical cannabis. The two firms had a five-year deal for Aphria to provide 175,000 kilograms of cannabis to Aleafia. This week, news broke that Aleafia was pulling out of the deal, saying Aphria hadn't supplied the amount agreed upon. The deal was reportedly worth $130 million -- not a massive percentage of Aphria's revenue. Nonetheless, it does raise a concern.

What will the stock do next week?

If Aphria posts a loss, the stock will probably take a significant swing downward, following the trend in this sector right now. But if it surprises on analyst estimates, or provides some updated guidance to upside, I think the stock could find traction. When you're in a market that's reporting losses, any good news is great news.

Before the acquisition and expansion binge under its former CEO, the company was operating profitably as a medical supplier. I bought it a few years ago based on that profitability. I have owned Aphria shares in the past. I sold my position near the stocks all-time highs, as the production and earnings were clearly not there yet. Since then, I've been hunting for a good price to pick up shares for the long term.

This fall/spring could be the final brute of losses for these companies. As Canadian cannabis firms have incurred the expenses related to ramping up their production and distribution abilities, it is my feeling that this fall/spring could begin to show the companies that have a legitimate business. The names that are well put-together will begin to get their house in order, while the companies that can't scale and manage expenses will begin to drop off. Names like CannTrust (CNTTQ) have already fallen into penny stock territory. My bet is that Aphria will become one of the former.

The company's market capitalization is now $1.3 billion; total shareholder equity was $1.7 billion at the end of fiscal Q4. The price-to-book value makes the stock appealing despite current losses, as long as this balance remains intact.