When the year began, cannabis stocks were expected to pick up right where they left off the previous three years. In other words, it was expected to be another banner year for the green rush, considering that Canada had just commenced adult-use weed sales and derivatives were presumed to hit dispensary shelves by no later than October.

Unfortunately, it's been nothing of the sort for the pot industry. Although there have been a few cannabis stocks that have bucked the trend, the vast majority of pot stocks are down by double-digit percentages. This includes Aphria (NYSE:APHA), which is the 28th most-held stock on online investing app Robinhood and the fourth most popular pot stock.

An up-close view of a flowering cannabis plant growing in an indoor farm.

Image source: Getty Images.

As of this past Tuesday, Dec. 17, Aphria's share price had fallen 14% in 2019, which actually means it's outperformed most of its Canadian cannabis-growing peers. Nevertheless, a double-digit decline isn't what investors signed up for at the beginning of the year, especially with marijuana sales expected to take off in Canada.

But given this decline, the question has to be asked: Is Aphria now a decent value that investors should buy? Before answering, let's take a closer look at the buy and avoid thesis on Aphria; then we'll circle back and tackle the question at hand.

The buy thesis

On the buy side of the equation, perhaps the biggest selling point for Aphria is the revenue predictability that the company can bring to the table. Although most folks think of Aphria as purely a marijuana grower, it can't be overlooked that the company acquired pharmaceutical distribution business CC Pharma in January 2019.

Despite pharmaceutical distribution being a relatively low-margin operating segment, it's on track to generate in the neighborhood of 375 million Canadian dollars in revenue for the current fiscal year, if not a bit more. Demand for pharmaceutical products tends to be pretty steady, meaning Aphria's top line is considerably more predictable than its peers.

To add to this point, Aphria's first-quarter operating results for fiscal 2020 featured an 8% increase in adult-use weed sales to CA$20 million, with an adjusted gross margin of almost 50%. Most pot growers have been contending with a modest decline in weed sales in recent quarters, so this proved to be a nice surprise for investors and demonstrated that the company clearly has a number of lucrative supply deals in place.

Multiple clear jars packed with dried cannabis buds on a counter.

Image source: Getty Images.

Aphria's production potential is also noteworthy. While operating only three cultivation farms, Aphria's peak capacity of 255,000 kilos per year would make it possibly the third-largest grower in Canada. Having two of its three grow farms top the 100,000 kilo-per-year peak production mark should allow Aphria to utilize economies of scale to push its per-gram growing costs below the industry average.

Lastly, this is a company that's sitting on a healthy amount of liquidity at a time when funding has once again become a concern. Aphria ended Q1 2020 with cash, cash equivalents, and marketable securities of CA$464.3 million, which should be more than enough to fund international expansion opportunities -- Aphria has access to nearly a dozen countries, primarily from stemming from its Nuuvera acquisition -- as well as broaden its high-margin derivative product portfolio.

Sounds like a slam-dunk buy, right? Well, not so fast.

The avoid thesis

On the other side of the aisle, Aphria (and the entire Canadian weed industry) is going to have to contend with persistent supply issues throughout Canada. Regulatory agency Health Canada has struggled to review and approve licensing applications in a timely manner, and Ontario, the country's most populous province, had just two dozen open dispensaries on the one-year anniversary of the commencement of recreational sales. In fact, the flagship Aphria Diamond joint venture took between 18 and 21 months to be approved for cultivation from Health Canada.

These factors, while fixable, are going to take regulatory agencies numerous quarters, if not years, to resolve, thereby allowing the black market to thrive. This means Aphria's production advantage isn't as meaningful as investors might think.

Next, it's important for investors to realize that Aphria's quarterly profits have all come with asterisks. You see, International Financial Reporting Standards for Canadian stocks require growers like Aphria to estimate the value of their crops each quarter, as well as their projected cost to sell these goods. This has resulted in positive fair-value adjustments that fail to capture how the business is really performing. If these one-time costs and benefits are stripped out of the equation, we'd see a company that's still losing money on an operating basis -- specifically with regard to its cannabis operations.

A person holding a magnifying glass over a company's balance sheet.

Image source: Getty Images.

A third issue to consider is investor trust. At this time last year, Aphria was contending with a scathing short-seller report that alleged multiple counts of wrongdoing following its acquisition of Latin American assets. Most of these allegations were proved to be unfounded by an independent committee. However, a handful of executives were found to have had conflicts of interest in the deal.

This is what led longtime (now former) CEO Vic Neufeld to step down. This also happened to be the second transaction in less than two years that drew the ire of Wall Street. Suffice it to say that once investor trust is lost, it's very difficult to regain.

Finally, Aphria's balance sheet isn't as appealing as it might sound on the surface. Yes, the company has plenty of cash on hand, but it's also lugging around CA$669.6 million in goodwill, most of which was derived from its Nuuvera and Latin American asset purchases. Though goodwill is common following an acquisition, it now represents 28% of the company's total assets -- and that's after a CA$50 million writedown on its Latin American assets. In short, it looks as if Aphria grossly overpaid for its acquisitions, making a future writedown likely.

The verdict

Now that we've taken a closer look at both sides of the aisle, we can circle back to the initial question: With Aphria down 14% year to date, is now the time to buy this pot stock?

After weighing both sides, my answer is no.

Silver dice that read buy or sell being rolled across a digital screen containing stock charts and volume data.

Image source: Getty Images.

While I appreciate Aphria's top-tier production potential, its ample liquidity, and the relative predictability of its cash flow, I can't in good conscience overlook the trust factor or the company's goodwill. The simple fact that Aphria already wrote down CA$50 million suggests that there's a very real possibility of future writedowns if the company is unable to recoup a significant portion of its goodwill.

The bigger problem here is that it's going to be extremely difficult for Aphria to rebuild trust with investors. Sure, it wasn't found to have grown marijuana illegally like a certain competitor, but the company has, on two occasions, raised eyebrows in a negative way with its major acquisitions. There's no timetable or concrete game plan on how to regain investor trust, which is what makes Aphria such a risky investment.

To be clear, my negativity surrounding Aphria doesn't run as deeply as it does for other pot growers in the Canadian space. I could more easily be swayed to  believe that Aphria is worth buying if I see clear signs of operating improvement and the rebuilding of investor trust. But for the time being, sticking to the sidelines looks to be the smarter decision for investors.