Even though marijuana stocks failed to duplicate their impressive returns in 2016 and 2017, this year will still go down as the most impressive to date for the cannabis industry.
To begin with, we witnessed Canada become the very first industrialized country to legalize recreational marijuana on Oct. 17. When the industry is running on all cylinders within a few years, it should be capable of generating in the neighborhood of $5 billion in added annual sales as a result of the Cannabis Act's passage. And, for investors, this should result in some clear winners within the cannabis space.
Within the U.S., two additional states voted in favor of medical cannabis initiatives during midterm elections last month, pushing the number of legalized states to 32. Residents in Michigan also voted in favor of a proposal there to green light adult-use pot. Now, one-fifth of all U.S. states allow for the consumption of recreational weed.
Aphria's four most-defining moments this year
Among popular individual marijuana stocks, few had as exciting a year as Aphria (NYSE: APHA). Even though its stock is notably lower, year to date, as are most pot stocks, Aphria had four major events that stood out in 2018 that have the potential to drive growth in the years that lie ahead.
1. A partnership with Double Diamond Farms
One of the biggest announcements this year came early in January when it appeared that the Cannabis Act would eventually gain approval in Canada's Parliament. On Jan. 10, Aphria entered into a strategic relationship with Double Diamond Farms to retrofit existing vegetable-growing greenhouses for cannabis production. This partnership (now known as Aphria Diamond) was geared at adding 120,000 kilograms of annual production at peak capacity, with the retrofit expected to be complete by January 2019.
Prior to this partnership, Aphria was primarily working on a single organic project, known as Aphria One. This four-phase, more than $100 million project was expected to yield around 100,000 kilograms at peak production. It, too, will be complete sometime in January 2019. This partnership more than doubled the company's maximum annual output at the time to 220,000 kilograms.
Thanks to Aphria One and Aphria Diamond, the company is expected to slot in as the third-largest producer by annual peak output at 255,000 kilograms.
2. The CA$425 million acquisition of Nuuvera
Another big moment for Aphria was the March 27 announcement that it had completed its cash-and-stock acquisition of Nuuvera for 425 million Canadian dollars. Since most marijuana deals tend to be share-heavy with little or no cash component attached, the final value of this transaction was hundreds of millions of dollars less than when the deal was originally announced as a result of a decline in Aphria's share price.
Although this was a highly criticized deal -- Nuuvera didn't add anything in the production department, and Aphria's management team disclosed ownership stakes in Nuuvera just a day prior to the closing of the deal -- it did help push Aphria into new markets. Nuuvera had infrastructure already laid in eight foreign markets. With Aphria's existing foreign deals, and the announcement of a supply deal with Argentina just days before the Nuuvera deal closed, Aphria had increased its sales presence to a dozen total countries.
With the strong possibility of domestic dried flower oversupply beginning early next decade, these foreign markets will be leaned on heavily to purchase excess supply.
3. The announced construction of an extraction center
In June, Aphria dazzled Wall Street and investors once again when it announced that it would construct a CA$55 million extraction facility that would allow the company to produce approximately 25,000 kilograms of cannabis-equivalent concentrates per year, when fully operational. The press release at the time noted that the first concentrates would be ready for sale as early as March.
What makes this announcement so important is that cannabis alternatives like concentrates typically have higher price points and juicier margins than dried cannabis flower. Even though we're talking about narrowing the consumer pool a bit, alternative products are less likely to be commoditized and face pricing pressures, which should lead to healthy operating margins.
Aphria has already been a leader in pushing cannabis oil use to its registered medical patients, and the addition of an extraction center gives it yet another margin advantage over its peers.
4. Uplisting to the NYSE
Lastly, in early November, Aphria's common stock officially began trading on the New York Stock Exchange (NYSE).
Why uplist from the over-the-counter (OTC) exchange, you ask? For starters, listing its shares next to time-tested, publicly traded businesses on the NYSE provides an added level of validity to the burgeoning marijuana industry. Secondly, not all Wall Street institutions are allowed to invest in or cover companies listed in the OTC exchange. By uplisting, Aphria put out the welcome mat for increased institutional coverage and investment. And third, it should help boost liquidity, which could invite more investors to dip their toes in the water, so to speak.
The big question
Of course, what investors are probably eager to know is what the future holds in store for Aphria. To that end, I do see plenty of potential, but with a lot of near-term risk.
As Canada's third-largest grower by forecast, it should have no trouble securing long-term supply deals and finding foreign markets to purchase some of its production. A diversified product line with plenty of alternative cannabis products won't hurt, either. There's even a chance that it could find itself a brand-name partner in the beverage, tobacco, or pharmaceutical industry in the upcoming year.
However, Aphria has been spending aggressively in order to get its Aphria One and Diamond projects finished. It's also constructing its extraction center and making acquisitions from time to time. This all means rising expenses and the high probability of operating losses in the near term.
As long as investors stick with their long-term perspective and don't get too caught up in what could be some ugly operating losses in fiscal 2019, Aphria has a chance to thrive.
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