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This Underrated Pot Stock Is a Scorching Buy

By David Jagielski - May 20, 2020 at 7:43AM

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Although it's been fairly consistent, Aphria hasn't gotten much love from investors.

A big challenge with investing in pot stocks is that bad returns by one company can send all the others into a tailspin. Aphria (APHA) is a good example. The company has been one of the better-performing marijuana producers over the past year in terms of both sales growth and profitability. But that hasn't been enough to turn the stock price around, as a negative outlook for the industry as a whole has kept Aphria's valuation from rising this year despite positive results. Here's a closer look at why the stock is undervalued and why it could make for a solid investment today.

Aphria's recorded a profit in three of the past four quarters

Profits are rare in the cannabis industry. As companies have grown, they've often gotten deeper and deeper into the red. But that hasn't been the case with Aphria. In the company's third-quarter results, released April 14, the pot producer showed that it had doubled its sales from the prior-year quarter while also posting a profit for the third time in four quarters.

Although the company did benefit from fair value adjustments, Aphria's also made progress in keeping its costs under control amid the high growth. Despite a big jump in revenue, general and administrative costs rose by a very reasonable 24%, while Aphria brought share-based compensation and market expenses down from the prior-year period. The company made further strides in bringing down its expenses when it announced on May 8 that it was repurchasing about CA$127.5 million of convertible notes. The move will bring down the company's debt and remove cash interest costs that total CA$6.7 million annually.

Cannabis plant.

Image source: Getty Images.

If Aphria can continue to find ways to trim its costs, it'll only make the company's profits more sustainable and likely to continue in future periods, and that's why it may be one of the safer pot stocks to invest in today.

It's in a strong financial position

Liquidity is a key consideration when investing in pot stocks, and in Q3, Aphria had 515.1 million Canadian dollars in cash and cash equivalents on its books. During the past nine months, it's burned through CA$124.4 million over the course of its day-to-day operating activities, which is one-quarter of the cash it has on hand. That's a good rate of cash burn that puts Aphria in a strong position to weather the COVID-19 storm should there be a slowdown in sales and the company's numbers start to falter.

While there may be many cannabis companies in danger of going under this year, Aphria doesn't look to be one of them. With a good cash balance, it may not need to issue shares in order to keep its operations going. It should provide cannabis investors with a relatively stable investment this year when compared to other pot stocks.

The stock is cheap

The Ontario-based pot stock has declined by more than 40% this year, which is worse than the Marijuana Life Sciences ETF (HMLSF -0.64%) and its 36% drop over the same period. It's a disappointing result given that Aphria's a better buy than your average marijuana company. But that also makes it a good opportunity to buy the stock today, while it's trading at a relatively cheap price. Here's how it compares against some of its peers when looking at price-to-sales multiples:

APHA PS Ratio Chart

APHA PS Ratio data by YCharts

Why Aphria could produce solid returns for investors

With a low share price and steadily improving financials, Aphria could be a hot cannabis company to pick up today. It's flying under the radar and underperforming the industry at a time when it should easily be beating it. If the cannabis company continues to produce strong results, it'll only be a matter of time before the stock's fortunes start to turn around. And with the moves Aphria's been making, it's not hard to be optimistic about the company's future results. While Aphria, like any other pot stock, isn't a risk-free investment, it's definitely one of the safer and better buys out there in the industry today.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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