Whether it's the ongoing COVID-19 outbreak or Saudi Arabia's recent attempt at an oil price war with Russia, there's a lot going on for investors to be worried about. The Dow Jones fell by over 2,000 points -- or 7.8% -- on Monday, extending what's been an already difficult past two weeks for the markets.
The situation isn't much better for cannabis stocks. The sector as a whole had seen substantial declines for most of 2019, a time when the rest of the stock market was doing well. If things are going to get worse from here on out, cannabis investors need to be very careful about where they put their money.
While other large-cap pot stocks are struggling to get their financial situations under control, there's one cannabis company that has impressed investors with its record of profitability. That company is Aphria (NYSE:APHA), and here are a few reasons why this stock could do well, especially as markets continue to crash.
Reason 1: Profitability
If you've been following the cannabis industry, you'll know that the majority of companies have failed to report a profit. In the case of most large-cap pot stocks, losses have failed to get better as initially promised by these companies' management teams.
Aphria stands out for being one of the few businesses that have managed to report multiple profitable quarters over the past year. For the past six months, Aphria recorded a net income of 8.5 million Canadian dollars. Aphria's revenue figures have skyrocketed as well, surging from the mere CA$21.7 million reported back in fiscal Q2 2019 to CA$120.6 million reported in fiscal Q2 2020 (which is the company's most recently released financial results, ending Nov. 30, 2019).
What makes Aphria unique is that its Canadian pot business isn't what's driving this growth. Instead, Aphria owns a German distribution subsidiary called CC Pharma, which distributes medical marijuana throughout Germany. Total revenue from CC Pharma came in at CA$86.4 million, dwarfing the CA$39.7 million reported from Aphria's Canadian cannabis business.
There have been many problems in the Canadian cannabis market over the past year that still haven't been resolved, such as the slow rollout of provincial dispensaries and the continued strength of the black market. As such, it's nice to see a company that has a strong international business that isn't affected by these problems.
Reason 2: A strong balance sheet
Revenues are great, but Aphria also has other things going for it as well. For one, the company has a healthy cash position of CA$497.7 million. Considering that Aphria is profitable for the most part, these funds could be used elsewhere if needed, like buying discounted cannabis businesses if the markets continue to fall.
While other cannabis companies have impressive cash positions as well, most of them are reporting significant losses. For example, Canopy Growth (NYSE:CGC) has CA$2.26 billion in cash and marketable securities. While impressive, the company has seen massive losses as well, around CA$126.2 million for its recent fiscal third quarter (ending on Dec. 30, 2019). That's also not mentioning the earlier CA$1.28 billion loss reported in its fiscal first quarter in August. Even though other companies might have more cash than Aphria, they are also burning through their cash reserves at an alarmingly fast pace.
There's also another balance sheet figure investors should pay attention to. For 2018 and the first half of 2019, cannabis companies have been on an acquisition spree, paying premiums to gobble up smaller companies at a rapid pace. These premiums end up accumulating on the balance sheet as goodwill and are a type of intangible asset.
However, since the market has changed so drastically, many companies have found that this accumulated goodwill is now a liability, with significant adjustments expected to come on the horizon. That's exactly what happened to Aurora Cannabis, which had as much as CA$3.2 billion in goodwill when its total market cap was only CA$2.8 billion at the time.
Since then, Aurora reported a massive goodwill adjustment to the tune of CA$800 million. Now the company's stock price has fallen so low that it borders on penny stock status, an astonishing decline for one of the industry's biggest names.
Aphria, on the other hand, has a relatively small amount of goodwill compared to its rivals. While the CA$669.7 million in goodwill on its balance sheet is noticeable, it's much smaller than many of its larger peers in the industry like Canopy which has over $2.64 billion in goodwill and intangible assets.
Reason 3: Cheap valuation
The last thing going for Aphria is its cheap valuation. The company trades at just 2.1 times its sales, whereas Canopy and Aurora both trade around 4.9 and 15.7 times sales, respectively.
Despite Aphria's profitability and healthier financial position, the company has been comparatively undervalued for many months now. The company's reputation has been tarnished since an earlier scandal regarding insider-motivated acquisitions in Central and Latin America in late 2018/early 2019. Despite the resignation of several key executives, the affair has left a bad taste in the mouths of some cannabis investors.
That's unfortunate, as Aphria's record of profitability coupled with its strong international business makes the company stand out from its larger, non-profitable competitors.
Aphria has much to gain
If the markets continue to crash, it wouldn't be surprising for investors to flee from cannabis companies that continue to report staggering losses. Instead, companies that showed some semblance of profitability -- like Aphria -- could see a resurgence in popularity. Considering how undervalued the stock has been, that's a definite possibility going forward.