Aphria (APHA +0.00%) has struggled over the years to generate strong returns for its investors. In two years, the stock has fallen by more than 25% and while there have been some good peaks during that time, they've often been short-lived and followed by big declines. In 2020, however, things definitely look a lot stronger for Aphria as there are many reasons why the stock could be a good buy heading into the new year.
It's doubling its capacity
Earlier this month, the company obtained a cultivation licence for Aphria Diamond, a subsidiary that Aphria owns 51% of, with the remainder being owned by Double Diamond. The greenhouse has production space totalling 1,300,000 square feet and can grow 140,000 kg of cannabis per year. This will bring Aphria's total production space to 2,400,000 square feet, and its annual cannabis production will now be able to reach 255,000kg.
But it's not just production capacity that investors should be excited about, it's that that location has "industry-scale automation technology." The automation will be able to handle many tasks including transporting plants, trimming, waste disposal, and many others. For a low-cost producer like Aphria, this is a great way for the company to bring its costs even further down in price and adding to its margins along the way.
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And there's definitely a need for prices in the industry to come down in order to be competitive with the black market, and with the new licence, Aphria is in a good position to be able to offer more competitively priced products. With a modest gross margin of just 22% in its most recent quarter, there's definitely ample room for the company to improve on its costs and to generate stronger, more sustainable profits along the way. After all, had it not been for fair value adjustments and other income giving the company a boost, its results could have looked a lot different.
The company has many new products ready to go
The additional capacity will certainly come in handy for Aphria as the company has many new products ready to go now that the next phase of legalization has taken place in Canada, permitting the sale of edibles and other derivative products. From vape pens to gummies, the company expects to have additional products available for sale in the coming year. And if Aphria can take advantage of lower production costs, it could have a big advantage over its peers by maximizing its margins and offering lower prices.
While there are still concerns about vaping-related illnesses, those problems appear to be linked to the black market where a lack of controls and no regulation can put consumers at greater risk.
It may only be a matter of time before the stock rallies
For the past several months, the cannabis industry has been plagued by scandals and poor results, which have had a very negative impact on not just Aphria but other marijuana stocks as well. The good news for investors is that over the past several weeks the stock has appeared to have stabilized as it has been flat since October. And with Aphria trading right around its book value and a modest six times its sales, which is very low for the industry, it could attract some value-oriented investors.
Key takeaways for investors
Additional capacity, new products, and the stock trading at a relatively low price are just some of the reasons why Aphria could be poised for a strong year in 2020. While there is still the risk that headwinds in the industry could continue to push Aphria's stock price down even lower, it's hard to see shares falling much further down given all the losses incurred thus far and the positivity surrounding the company.
For now, it's a stock that investors will want to keep a close eye on as it could just be a matter of time before it starts to recover. Aphria has slowly established itself as one of the safer cannabis stocks out there, and that's why it could be one of the better buys today.
