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Stocks  | December 30, 2019

Marijuana stocks keep trying to carve out a bottom, but their efforts have been sketchy.

After plunging in November, Aphria (NYSE:APHA), Canopy Growth (NYSE:CGC) and others have recovered meaningfully. However, that recovery is starting to wane, leaving many bulls wondering whether more new lows could be on the way.

They’re trying to determine if the sector experienced a dead-cat bounce which will eventually lead to new lows or if marijuana stocks have bottomed but are having trouble rising further amid  investors’ lack of trust and tax-loss selling.

The Overvaluation of Marijuana Stocks

The biggest issue for the cannabis space is overvaluation. However, it’s not as clear-cut as some bears make it seem. While they may compare cannabis stocks to the dot-com bust, that’s not a perfect analogy.

Granted, when Tilray (NASDAQ:TLRY) exploded from the $20s to almost $300, there were certainly bubble-like signs in play.

There are other examples of unwarranted gains by cannabis stocks. However, marijuana stocks’ valuations appear huge simply because many of these companies generate very little revenue.

But because the U.S. and countries around the world are deregulating and decriminalizing cannabis for medical and recreational purposes, bulls are betting that cannabis’  tangible, addressable market will increase considerably in coming years.

That phenomenon has already started, with many companies sporting triple-digit revenue growth rates.

Why Aphria Is a Name to Consider

Many marijuana stocks stumbled into 2019, but quickly found their footing and raced higher. Aphria was one of those names. A year ago, the stock was trading for $4.55. By early February the shares had more than doubled, climbing above $10.

But just like Aurora Cannabis (NYSE:ACB), Canopy Growth, Cronos Group (NASDAQ:CRON) and so many others, Aphria has been under intense pressure since that first-quarter spike. Unlike many of its peers, though, Aphria’s financials are at least somewhat attractive.

In fiscal 2018, Aphria had sales of 36.9 million CAD. In FY19, the company generated revenue of 237 million CAD. The company’s FY20 ended in May, and it’s been stepping on the gas even more since then. Last quarter, Aphria had revenue of 126.1 million CAD, up 849% year-over-year. Keep in mind, that last quarter’s sales were more than 50% of FY19’s total.

Also, unlike many of its peers, Aphria is reporting positive earnings. It’s put together two consecutive profitable quarters, and it has had a positive bottom-line result in four of its last five quarters. Granted, its net income of just 16.4 million CAD (7 cents per share) isn’t blowing the roof off, but it’s better than what a majority of its peers are doing.

Aphria isn’t perfect. For instance, it’s not reporting positive free cash flow yet. However, it’s got momentum.

Analysts on average predict sales of $437 million this year. With a market cap of about $1.25 billion, Aphria shares trade at less than three times this year’s average revenue estimate. Further, Aphria has 449 million CAD of cash and equivalents on its balance sheet. In fact, it has enough cash liquidity to easily cover current its liabilities of 122.9 million CAD.

In short, Aphria is slightly profitable, has intense revenue growth and a liquid balance sheet. While the entire industry is under pressure, Aphria stock looks like a reasonable, speculative pick for investors.

Trading APHA Stock

Aphria’s chart is a bit sloppy, but that’s what you get when you’re dealing with a $5 stock in a volatile industry.

Aphria is trying to stay above its  50-day moving average, while the 100-day has been a tough nut to crack. If APHA rises above those levels and the $5.50 mark, perhaps Aphria can get some traction.

However, it’s most important for the stock to stay over $4.50. That was the low from almost a year ago and, except for a temporary (although violent) breakdown in November, this area has been a line in the sand for the bulls. A break below this level puts the $3.76 low back on the table.

So bulls will try to keep Aphria above $4.50, then reclaim the 100-day moving average and $5.50.

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