Ask any cannabis stock investor, and they'll tell you this isn't how it was supposed to go for the marijuana industry. After looking primed to push toward profitability, cannabis stocks faded in 2019. Supply issues in Canada, high tax rates in select U.S. states, and a resilient black market throughout North America have made life difficult for pot stocks.

But the substantive declines that cannabis stocks dealt with last year now have some folks believing pot stocks might be a bargain. One such name that continues to (pardon the pun) crop up is Ontario-based Aphria (NYSE:APHA).

But is Aphria, a top-tier Canadian grower that lost about half of its value since early April, really a cannabis stock that investors should consider buying in 2020? As you're about to see, probably not.

Before I dig into the details behind my skepticism surrounding Aphria, let's discuss some of the factors that have made Aphria one of the most popular marijuana stocks.

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On paper, Aphria appears to have what it takes to be a winning investment

Aphria seems like a major player in the Canadian space. The company's three cultivation facilities -- the joint-venture Aphria Diamond, Aphria One, and Broken Coast Cannabis -- are capable of 255,000 kilos of combined peak annual output. Having only three cultivation farms should lead to Aphria recognizing lower production costs via economies of scale. Additionally, having only three grow farms may allow Aphria to be more nimble than its peers in adjusting its costs and output to match market demand.

Aphria is also well-positioned to take advantage of growth opportunities beyond its domestic borders. Thanks to its acquisition of Nuuvera in March 2018, Aphria has access to nearly one dozen countries, including Canada. These foreign markets should come in handy if and when dried cannabis flower becomes oversupplied and commoditized in Canada. Being able to ship product overseas will help save Aphria's margins from deteriorating.

Of course, Aphria has also been profitable for two consecutive quarters. Whereas most large growers have been losing money at an extraordinary pace, Aphria reported $16.4 million Canadian in net income in its fiscal first quarter. The acquisition of drug distributor CC Pharma in Jan. 2019 has also helped to put some pep in the company's top-line numbers.

While this probably all sounds great, there are a number of potential flaws in the buy-side thesis for Aphria.

A person holding a magnifying glass over a potted cannabis plant.

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Here's why Aphria isn't a pot stock you'll want to own in 2020

For starters, the company's net income should come with an asterisk. That's because Aphria's cannabis operations continue to lose money if you remove a number of one-time benefits and costs.

In particular, International Financial Reporting Standards accounting requires Canadian growers to regularly estimate and adjust the value of their crops, as well as their cost to sell these products. In Aphria's case, these fair-value adjustments have worked in its favor, pushing the company into the profit column. But if you focus solely on Aphria's operating results without fair-value adjustments, it's still losing money.

Aphria is also toting around an unsightly amount of goodwill on its balance sheet, most of which is tied to its purchase of Nuuvera and its acquisition of Latin American assets, both of which occurred in 2018. Aphria ended the fiscal first quarter with nearly CA$670 million in goodwill, representing 28% of the company's total assets. What you may not realize is that this already includes a CA$50 million writedown on its Latin American assets taken last year. I find it unlikely that Aphria is going to recoup a significant portion of this goodwill, making future writedowns a very real possibility. 

But perhaps the bigger issue here is that Wall Street has lost trust in Aphria, and that's not something that'll be easy to regain. After the company was accused of fraud in December 2018, an independent committee found most of the allegations in a short-seller report to be baseless. However, the committee did find that a handful of executives had conflicts of interest in the Latin American asset purchase. This led longtime CEO Vic Neufeld to step down.

And that's not all. Just a day prior to the closing of the Nuuvera acquisition in March 2018, it was reported that a number of Aphria execs had a position in Nuuvera. While it's not unheard of for the insiders of a company to own an equity stake in a business it's buying, investors would want to know this information more than a day in advance prior to closing. Trust is very hard to rebuild, and it's likely to hold Aphria back in 2020.

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What would make Aphria a buy?

Although I don't believe Aphria is a cannabis stock that investors should be buying right now, it does have the intangibles to eventually be a successful company. Here are a few things that would need to happen to potentially change my mind about Aphria as an investment.

First, I'd like to see Aphria's cannabis operations push into recurring profitability without the need for fair-value adjustments. With construction costs in the rearview mirror and growers now selling higher-margin derivative products, it's not out of the question that Aphria could begin delivering no-nonsense profits by the second-half of 2020. Just make sure to sift through the company's pharmaceutical-distribution revenue to get to the meat and potatoes of its higher-margin pot business.

Second, I'd like to see Aphria bite the bullet, so to speak, and write down a portion of its goodwill. It's unlikely that the company is going to recoup anywhere close to CA$670 million in premium paid, so coming to terms with that fact sooner rather than later is going to be the right move.

Aphria clearly has some work ahead of it, and its rightful place for the time being is on your watchlist, not in your portfolio.