If Warren Buffett looked at the cannabis sector, he would probably be terrified.
Buffett has built his fortune on value stocks – and with expectations running red hot for the global cannabis industry, many of the best cannabis stocks are trading with sky-high valuations.
However – one early industry leader is breaking the mold.
There is one early leader in Canada’s high-growth cannabis industry that value investors need to know about right now.
Aphria (APHA, APH) is an early leader in Canada’s high-growth cannabis industry and is also the most undervalued stock in the entire sector.
Aphria has a market value of $1.75 billion and has the third-highest cannabis production level in Canada at 250,000 kilos/year. With this kind of size and scale, Aphria is in position to dominate the Canadian and global cannabis markets.
Despite the promising outlook – there is something peculiar about Aphria. The company’s share price trades at a huge discount to its sector peers.
Aphria is trading with a price-to-sales ratio of 11X. That means it would take 11 years of sales to buy the company.
This is a huge discount to other industry leaders.
- Canopy Growth Corp (WEED, CGC) has a P/S ratio of 68X.
- Aurora Cannabis (ACB, ACB) has a P/S ratio of 53X.
As you can see, Aphria is trading at a fraction of its peers. This creates a great opportunity for value investors interested in cannabis stocks.
Why Is Aphria so Much Cheaper Than Its Peers?
There’s a reason why Aphria is so cheap compared to its peers. Aphria’s share price took a beating in late 2018, falling more than 70% after former CEO Vic Neufeld was accused of questionable business deals and financial management.
However – in the long run, this huge drop has created a great opportunity.
Aphria quickly fired Neufeld, installed new management, and now the company is dominating like no other company in the entire Canadian cannabis industry.
Don’t believe me?
Take a look at Aphria’s second-quarter earnings report. Aprhia delivered the single best quarter we have ever seen in the history of the North American cannabis sector. Here are some more details from the press release.
- Net revenue of $128.6 million in the fourth quarter, an increase of 75% from the prior quarter and 969% from the prior year.
- Revenue for adult-use cannabis of $18.5 million in the fourth quarter, up 158% from the prior quarter.
More importantly, Aphria became the first of the three largest Canadian cannabis company’s to show a profit.
- Net income of $15.8 million and adjusted EBITDA of $0.2 million in the fourth quarter.
- Adjusted EBITDA from cannabis operations of $1.9 million in the fourth quarter.
Here’s a link to Aphria’s full earnings report.
Meanwhile, most investors are still treating Aphria like damaged property – which is a big mistake.
Aphria just emerged as the most profitable of the big Canadian cannabis companies, and that big win has yet to accelerate its share price.
Shares Have Been Volatile on the Chart for APH
Aphria has been volatile for the last twelve months. Shares fell sharply in late 2018, rebounded in the first quarter and then fell lower again with the broader cannabis sector in the second quarter.
Looking forward, I expect two factors to drive shares of Aphria higher – the awesome quarter and undervalued share price.
The Big Picture on Aphria
Value investors don’t have to shun the cannabis sector. Aphria is an early industry leader that trades at a sharp discount to its peers.
Shares are trading 50% below the 52-week high, and I view this as an opportunity to buy a current and future industry at a sharp discount to its peers.
About the Author
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.