At this juncture, it’s worth noting that Grizzle was the only equity research firm to take on the Aphria short seller allegations head-on immediately after they published their deeply flawed and purposefully misleading short report.

Large institutional sell-side firms like Scotiabank and CIBC (to name a few) suspended coverage immediately, only to publish rebuttals weeks later, effectively reiterating Grizzle’s main points. And now we’re just shy of a three bagger ($5 to $15 CDN).

Big Consumer Companies Still on the Hunt: Aphria Represents Deep Value

By 2020 Aphria will have a cannabis growing capacity of 255,000 kg, making it the third largest producer in Canada.

Global CPG (consumer packaged goods) companies continue to remain on the hunt for cannabis investments and partnerships. They simply can’t afford to take a wait and see approach for the simple reason that no one is buying their unpalatable products anymore.

Aphria represents an opportunity for a CPG company to invest in a company with significant scale and low-cost operations.  An equity investment becomes a lot more palatable because Aphria trades at a multiple below potential acquirers (9x EV/EBITDA vs 12x) — this is very significant.

Right out of the gate the earnings of Aphria (or any other company trading at a discount) become accretive for the CPG company — this is exactly what growth-starved players are looking for.

On a valuation basis, Aphria could be acquired at $20/share and still be significantly accretive to Wine & Spirits companies.

Canadian Cannabis Peers: 2020 EV/EBITDA Multiples

Source: Grizzle Estimates

Significant Short Covering

John Mastromattei (Twitter: @LamboJohnny) has done masterful work sleuthing trade data to determine that we are currently seeing very large Aphria short covering on the NYSE, one of the main reasons the company has rallied over the last 3 trading days.

We can confirm this because CIBC is the cross-border broker between the NYSE and the TSX.

For example, if there are buyers of Aphria in the U.S. and there aren’t enough shares CIBC will acquire them on the TSX and sell them on the NYSE.

CIBC has been seeing large volume in Aphria recently, telling us cross-border short covering is going on en masse.

 

Performance Relative to Cannabis Peers

Since the publication of the short report, Aphria is now up +32% and the most vocal shorts on social media have gone silent as brokers are asking them to cover their short positions.

Aphria, however, is still underperforming Aurora by 6% since the publication and Canopy Growth by 12%.

Relative Performance Since Short Report (Indexed)

Source: Yahoo Finance (Feb 4 2019 data to 12:00 EST)

The more notable opportunity is looking at a catch-up trade since the Horizons Marijuana ETF (Ticker: HMMJ) last peaked on Sept. 21, 2018.

Aphria is underperforming the index, Canopy Growth and Aurora by 17%, 31%, and 18% respectively.

The upside for Aphria if it catches up to the index is a $17.50 stock price, 23% higher than where we are today.

Relative Performance Since the September 2018 HMMJ Index Peak

Source: Yahoo Finance (Feb 4 2019 data to 12:00 EST)

In the interest of full disclosure, employees of Grizzle personally purchased and currently own stock in Aphria, Inc. See the Content Disclosure section here on our Terms and Conditions page for more details.