Citron Research Provides Aphria Inc (TSE:APHA) The Ideal Diversion

Benjamin A. Smith
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Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E) received a surprising ally today, as it seeks to move on from unfortunate report allegations.

At this point, there’s hardly necessity to recap what those allegations entail. Hindenburg Research’s Monday report titled A Shell Game with a Cannabis Business on the Side depicts everything readers need to know about the subsequent tenor of ‘research’. While the allegations initially hit like a thunderbolt, subsequent declarations by Quintessential Capital Management founder Gabriel Grego that Aphria stock is worthless, along with discrepancies in several research details, have significantly dampened credibility.

Enter Citron Research, who surprisingly appeared to support Aphria’s overall value proposition. The bearish-centric market participant tweeted-out their support this afternoon, characterizing APHA as “compelling on all metrics”, while simultaneously suggesting the “stock should see US$10.” Perhaps most pertinent to investors was the promise of “More details to come”, which implies additional backing is coming. It was an unexpected twist in the ongoing saga between Aphria and Hinderburg Research, whose communique hit the common like a sledgehammer this week.

Almost instantaneously, the tweet caused algos to temporarily lift APHA around nine percent.

Irrespective of the initial gains—which were fleeting anyway—Citron Research’s involvement potentially gives Aphria something much greater: someone to refute Hindenburg’s allegations on their behalf. Not only that, but another peer short-seller that specializes in making its target look bad. It’s a great opportunity to let two cobras strangle each other with opposing viewpoints, while Aphria slowly disengages from the public spotlight. The old P.T. Barnum saying, “There’s no such thing as bad publicity” may apply in the entertainment world, but not public finance.

Also recall that Citron has previously disseminated three separate bearish calls on individual cannabis names (Tilray, Namaste, Cronos), making the optics of support more enticing. Whatever is coming down the pike isn’t emanating from a known cheerleader squad or paid research.

With Citron Research entering the fray, Aphria has an additional bullhorn to plead its message of innocence. Company CEO Vic Neufeld has already vowed to rebut the allegations line-by-line, which will reportedly be delivered next Wednesday. In conjunction with Andrew Left’s outfit, it should help drown out Hindenburg’s narrative of greasy insider dealings, worthless LATAM assets, and shell company malfeasance.

In light of Altria Group‘s C$2.4 billion investment in peer Cronos Group Inc., reputation among the Canadian LPs most definitely matters. Given the high-stakes of billions of dollars of multinational CPG money entering the space, Aphria will protect its reputation at all costs. Luckily, it will get additional help in this regard.

Final Thoughts

In the end, Aphria’s potential hand-off is probably the scenario everyone craves. Aphria, obviously, wants to focus on getting back to business; regulators likely want nothing to do with a scenario where fraud is unproven and collateral actors are plenty; Hindenburg already made their money, and are likely shifting attention to other victims. If Aphria can tighten governance by initiating an insider shake-up and improving best practices, perhaps everyone can go about their merry way.

While it may not stop shareholder class action lawsuits from being filed, those can take years to play out. By that time—assuming the lawsuits even have merit—Aphria’s ‘hockey stick’ revenue/profitability curve can cure many ills. In the meantime, the main order of business, I would imagine, is keeping the regulators at bay and reinforcing investor confidence to prior crisis thresholds.

Unexpectedly, Citron Research may be just the outfit to help Aphria navigate its way out of choppy waters.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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