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Inside the Market Monday’s TSX breakouts: This lagging pot stock is snapping back with 54% upside forecast

On today’s TSX Breakouts report, there are 24 stocks on the positive breakouts list (stocks with positive price momentum), and 23 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appears on the positive breakouts list - marijuana producer Aphria Inc. (APH-T). On Friday, the share price of this pot stock popped 23 per cent on the back of speculation that the company may strike a marijuana-infused beverage deal with alcohol beverage giant, Diageo. This pot stock has been a laggard with its share price falling 25 per cent year-to-date. However, analysts believe its share price may continue to rebound. The stock has a unanimous buy call with the average target price implying a potential one-year return of 54 per cent.

A brief outline is provided below that may serve as a springboard for further fundamental research.

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The company

Leamington, Ont.-based Aphria produces and sells medical marijuana products. The company is one of the lowest cost producers in the industry owing to its greenhouse operations at its flagship facility in Leamington.

Its share price spiked 23 per cent on Friday driven higher on a BNN Bloomberg report suggesting that Diageo, a leading global alcoholic beverage producer, is having discussions with several Canadian marijuana producers to negotiating a potential deal to produce marijuana-infused products. Diageo is an industry leader whose products are sold in more than 180 countries. Diageo has over 200 brands including popular labels such as Guinness, Smirnoff, Baileys, Crown Royal, Captain Morgan, and Johnnie Walker.

Before the markets opened on Aug. 1, Aphria reported its fourth-quarter financial results for fiscal 2018 (the company’s year-end is May 31). Reported revenue came in at $12-million. All-in cost per gram of marijuana produced increased to $1.60 from $1.56. On the earnings call, the company’s chief financial officer stated, “This cost increase was tied to ramping up labour in advance of the production increase while we waited for Health Canada approval to plant in our part three expansion.” Current production capacity at Aphria One is 30,000 kilograms per year and 5,000 kilograms per year at Broken Coast (its indoor marijuana operation in British Columbia). However, production capacity is expected to ramp up significantly. By June 2019, management anticipates the company will be harvesting over 20,000 kilograms per month. The share price declined 8 per cent that day.

On June 28, Aphria completed a $259-million bought deal issuing approximately just under 22-million shares at a price per share of $11.85. The proceeds from the financing are earmarked to fund capacity expansion as well as to finance potential future strategic investments and expand the company’s international platform. This was the company’s second equity financing year-to-date. On Jan. 3, the company completed a $115-million bought deal financing, issuing over 8.3-million shares at a price per share of $13.75.

Last December, management announced that the company had signed an agreement to be a medical cannabis supplier to Shoppers Drug Mart, subject to Shoppers Drug Mart’s approval by Health Canada to be distributor of medical marijuana.

Dividend policy

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The company is focused on growth and currently does not pay its shareholders a dividend.

Analysts’ recommendations

This health care stock with a market capitalization of $3.25-billion has recent research coverage by seven analysts, of which all seven analysts have ‘buy’ recommendations. More specifically, five analysts have “buy” recommendations and two analysts have “speculative buy” recommendations.

The seven firms providing recent research coverage are as follows in alphabetical order: Clarus Securities, Canaccord Genuity, Cormark Securities, Eight Capital, GMP Securities, Haywood Securities, and PI Financial.

Revised recommendations

Earlier this month, four analysts revised their target prices.

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Jason Zandberg, the analyst from PI Financial, increased his target price to $28 from $26.

Taking an opposing position, Neal Gilmer, the analyst from Haywood Securities, lowered his target price to $20 from $23. In addition, Martin Landry from GMP Securities reduced his target price by $5 to $15 (the low on the Street). Noel Atkinson, the analyst from Clarus Securities, took his target price down to $25 from $26.25.

Financial forecasts

The Street is forecasting revenue of $200-million in fiscal 2019, up from $$36.9-million reported in fiscal 2018, with revenue forecast to rise to $576-million in fiscal 2020. The consensus EBITDA (earnings before interest, taxes, depreciation and amortization) estimates are $55-million in fiscal 2019 and $209-million in fiscal 2020. The consensus earnings per share estimates are 18 cents in fiscal 2019 rising to 86 cents in fiscal 2020.

Over the past several months, earnings forecasts have edged lower. For instance, three months ago, the consensus EBITDA estimates were $67-million for fiscal 2019 and $228-millin for fiscal 2020.

Valuation

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According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 11 times the fiscal 2020 earnings forecast.

The average one-year target price is $21.50, implying the share price may appreciate 54 per cent over the next 12 months. Individual target prices are as follows in numerical order: $15 (the low on the Street is from the analyst at GMP Securities), $16.50, $20, $24.50, $25, $27, and $28 (the high on the Street is from the analyst at PI Financial).

Insider transaction activity

Most recently, between May 15 and May 22, chief scientific officer Gary Leong sold a total of 14,156 shares at an average price per share of approximately $12.91, reducing his account balance to 20,050 shares.

Prior to that, between May 4 and May 14, co-founder and co-chair Cole Cacciavillani divested a total of 605,800 shares at an average price per share of approximately $11.05, leaving 5,371,706 shares in his portfolio.

Chart watch

Year-to-date, the share price is down 25 per cent making it the worst performing stock in the S&P/TSX composite health care sector index. In contrast, its marijuana industry peer, Canopy Growth, is the top performing stock in the sector with a gain of 97 per cent.

Aphria’s share price has been volatile this year. As of August 14, the stock price was down 53 per cent year-to-date. However, over the past eight trading sessions, the share price has snapped back, rallying 61 per cent and closing at its highest level so far this year of $14.01 on August 24, up from its year-to-date closing low of $8.72 set on August 14.

On Friday Aug. 24, the stock price increased 23 per cent on unusually high volume with over 35-million shares traded. Its three-month historical daily average trading volume is just over 7-million shares. The share price has broken out of a downtrend that had been in place since the beginning of the year.

Looking at key resistance and support levels, the share price is approaching initial overhead resistance around $15. After that, there is a major ceiling of resistance around $20. Looking at the downside, there is initial technical support around $13, at its 200-day moving average. Failing that, the stock has strong technical support between $10 and $11, which is close to its 50-day moving average (at $11.28).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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