It’s Time to Hit Pause on Aphria Stock Until It Clears This Issue

Thanks to a combination of youth and controversy, marijuana companies experienced both phenomenal growth and devastating lows last year. But despite this acknowledged volatility, cannabis firm Aphria (NYSE:APHA) managed to shock even hardened investors. Over the trailing three months, Aphria stock hemorrhaged 55%.

Such a dramatic fallout never occurs without a reason. For APHA stock, the underlying company found itself in a short-seller’s crosshairs. Last month, Hindenburg Research made a painful accusation, calling Aphria a “shell game with a cannabis business on the side.”

At the heart of the controversy is the company’s Latin American acquisitions, which Hindenburg labeled “largely worthless.” Specifically, the short-seller alleges that APHA insiders had a financial stake in the acquired assets. Therefore, the buyouts had little to do with the raising value for Aphria stock. Instead, management enriched themselves at the shareholders’ expense.

It’s not a stretch to say that the marijuana industry doesn’t enjoy the most philanthropic of reputations. When the accusations first broke, APHA stock wasn’t the only victim. Like a tidal wave, the controversy took down major players like Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC).

Unfortunately for passersby, guilt by association is a risk of doing business in the botanical industry. But with several competitors, including Aphria stock, experiencing significant bullishness, did the bears prematurely condemn APHA?

Aphria Stock Remains Ambiguous

On one hand, we can appreciate why many investors view Hindenburg’s accusations with cynicism. As the short-seller, they have a vested interest in moving APHA stock in a particular direction. They’re not disseminating their accusations for the public’s benefit.

Furthermore, this is not the first time we’ve seen bearish intrusions in this sector, nor will it be the last. As I mentioned last month, notorious short-seller Citron Research blasted Cronos Group (NASDAQ:CRON) for deceptive business practices. Today, Cronos has a partnership with tobacco giant Altria Group (NYSE:MO). It’s also one of the best-performing marijuana stocks.

Bears love picking on cannabis firms due to the relative lack of knowledge. This is still a fresh investment sector prone to extreme emotions. In addition, low trading volume means that shorting specialists can use their influence to their advantage.

On the other hand, prospective buyers interested in Aphria stock are still waiting for an official response. After Hindenburg leveled its accusations, APHA’s management team declared them as libelous. They promised a counterattack that would clear their name.

Naturally, the question is, where is it? We’re now almost two months into the allegation’s reveal, and we haven’t heard a peep. Due to the gravity of the situation, management should have substantively defended themselves right away. Failing that, the next best time was during the second-quarter conference call.

As our own Vince Martin asserted, every cannabis firm is also their industry’s public-relations officer. He wrote:

“This is a new sector, and a number of pot companies have inexperienced managers and are or were listed on the pink sheets. So the space still needs more credibility. Aphria can add to the sector’s credibility or undermine it.”

At the very least, Aphria stock is a distraction.

I Like the Idea of Aphria, But Not APHA Stock

If you’re considering APHA stock, you ultimately face two choices: either you believe the accusations regarding insider dealings, or you don’t. The other negatives, such as disappointing financial performances, don’t really matter right now. For cannabis firms to achieve lasting success, they must lay down the foundations today.

This brings up an awfully difficult dilemma. If the company did everything the right way, I’d look at Aphria stock as a long-term buy. Thanks to its low production costs and its robust output capacity, you get a lot for your money. But the value of this discount hinges on Hindenburg’s ominous dark cloud.

Based on my research, the consensus toward Aphria stock appears split. Many harbor skepticism, especially because this sector is so controversial. But we also have voices like The Motley Fool’s Keith Speights. He believes that Aphria’s special committee assigned to investigate the allegations will not reveal anything overly damaging.

I’m not so sure. For one thing, we’ve seen questionable behavior from APHA before. Back in the early spring of 2018, executives failed to properly disclose its equity stake in takeover target Nuuvera. This was the first indicator that the higher-ups care more about enriching themselves rather than their shareholders.

Still, people usually forgive a one-off incident as a mistake. But when an almost-identical controversy repeats itself, it’s not a mistake … it’s a pattern.

The bottom line is that I like the idea of Aphria: an undervalued, low-cost cannabis producer. But until it clears its name, APHA stock is a huge gamble.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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