With apologies to many other cannabis companies, this article focuses on the 21 of them for which we have been able to capture comprehensive investor-related data. In this article, we show how we capture the data and apply it to a proprietary algorithm to generate portfolio management decision-support information.
Let beauty be in the eyes of the beholder; however, also let every interested investor understand that there is a huge gap between company data as filed with securities regulators and the forward-looking statements, inferences and dreams projected by these companies in their websites and public media exposure.
Without much comment, we will let the data speak for itself. But first you need an explanation.
Every week we compile a couple dozen data points for over 5,000 listed companies. This information is assembled from corporate filings and analyst reports by Thomson Reuters, the premier Big Data company where we retrieve it. In addition to the components of the major indexes (Dow 30, S&P 500, Russell 3000, ACWI 500), we retrieve the same data for hundreds of small-cap natural resources companies and other companies in order to study them to trade them in client portfolios.
We also capture the same data now for a growing number of cannabis companies. When more of these companies meet their regulatory requirements and more industry analysts report on them, our database will expand.
Here is a sample of the 35 fundamental data series that we obtain and then massage.
- Y/Y Forecasted Next Year Sales
- Y/Y Forecasted Next Year EPS
- 3-Month Consensus EPS Revision % Change
- Consensus Est. Enterprise Value-to-EBITBA
- Estimated Net Income-to-Sales
- Net Debt-to-EBITDA
- Cash Flow-to-Total Liabilities
- Current Mkt Cap-to-Forecasted EBITDA
- Current P/BV Relative 5-Year Mean P/BV
Once weekly, we run this data for all 5,000+ companies to get relative rankings of any stock against the Universe or its sector or within any peer group we choose such as a portfolio or a group of stocks in an industry like cannabis.
For our purposes today, we used the US stock market tickers for the 21 cannabis companies, although the primary tickers for several are on the Canadian exchange.
On the fundamentals data we receive, we apply a proprietary algorithm to compute relative scores for categories like Growth, PEG, EPS and Revenue Revisions, etc., which will be displayed in this article for cannabis companies.
In the Williams Market Analytics Fundamental Scoring System, scores range from 0 (weakest) to 100 (strongest) and are centered around 50, like a diffusion index.
So, without getting into technical (market price and volume) studies that are part of our decision-support trading process, you can see we have an investment process based on fundamentals.
Now let’s examine the scoring of the 21 cannabis companies we reviewed for this article. The first illustration is of Growth.
For statistical reasons, we apply a maximum score of 100 to all 5,000+ companies, for all calculations. This methodology resulted in seven of the 21 cannabis companies having 100 scores for Growth and hence receiving a T1 (tied for #1) ranking.
That result reflects the explosive growth in the cannabis industry, particularly in the revenue part of the calculations, if not yet in earnings.
Of the 21 companies, there was insufficient data to calculate scores on four. But of the 17 we scored, fully 16 of these companies scored more than 79.0, which is outstanding, and is the reason so many investors are watching the industry closely.
Without looking further, we found that only Cronos Group (CRON) failed to make the cut on Growth scores.
The lowest Growth score that we found acceptable for investment was Organigram (OGRMF) at 79.53, which stood at 237 out of 4,113 ranked companies this week (May 9 data). And yet Organigram ranked only #16 out of 17 of these cannabis companies. Nothing further needs to be said.
Note that the database universe exceeds 5,000 companies, but the scoring universe for each criterion is less because the reported data from the companies and/or the analysts was insufficient. In fact, for the emerging cannabis industry, we were unable to analyze several criteria that we do every week for mature companies.
The second illustration is for Price-Earnings Growth.
Here is where Earnings matter and the fact that only five of the 21 companies could be scored shows where investors need to focus. Cannabis companies can either walk the talk that investors want to see or they cannot.
Of the five scored companies for PEG scores, Auxly Cannabis (OTCQX:CBWTF) was best, followed by Acreage (OTCQX:ACRGF), Charlotte’s Web (OTCQX:CWBHF), Organigram and CannTrust (NYSE:CTST). In the universe of over 5,000 companies of which we were able to score 3,096 for PEG, only CannTrust failed to make the cut.
Interesting is that some of these companies are being acquired by larger companies, probably to learn the ropes on how to generate earnings.
The third illustration is for EPS Revisions.
Bear in mind that we are not referring to absolute earnings here. When companies guide from a major loss to a minor loss, the analysts take note.
On this EPS Revisions basis, 15 of the 21 companies received a score, but only three were acceptable for additional study, Canopy Growth (CGC), Green Growth Brands (OTCQB:GGBXF) and Hexo Corp (HEXO). The best the rest could do against the universe of 3,988 companies that received scores for this measure was Acreage Holdings ranked 2,206 followed by CannTrust at 2,880 down to Cronos (CRON) at 3,957.
The fourth illustration is for Revenue Revisions.
Of the 16 companies that we were able to score, Kush Bottles (OTCQB:KSHB) received a T1 (tied for the maximum of 100).
For KushCo, revenue is soaring. Unfortunately, so are losses, which underlies my point that full studies are required – just to examine the fundamentals. Then there are the technicals, and after that the legals (which in the case of KushCo are interesting) and the takeover plays, etc.
Of these 16 companies, investors would take note that maybe only six received scores and rankings that would be acceptable.
The fifth illustration is for Valuation, which we based on the consensus analyst estimates of Enterprise Value (EV) to EBITDA and EV to Sales.
None of the companies made the rankings cut, but Harvest One (OTCPK:HRVOF) was close at 1,042 out of 4,686, KushCo. ranked 2,081 and Auxly ranked 2,780, which were the next best in order.
The sixth illustration is for the Price-to-Earnings Ratio (PER).
Only six of 15 companies that we were able to rank scored well. These figures represent the data; however, we take it with a grain of salt.
The seventh illustration is for Market Cap to forecasted EBITDA.
At least the analysts have reported an estimated EBITDA for those companies.
The eighth illustration is related to Book Value.
In the case of Market Price to Book Value analysis, 15 of the 20 scored companies received an acceptable ranking. Green Growth Brands received a maximum score of 100 (T1 ranking, like many others, in the universe of 4,880 companies).
All 21 companies received a score based on estimated net income and estimated EBITDA to Sales.
CannTrust was fourth, the highest ranked of this group of 21, and it was ranked 4,238 out of 4,630. Clearly not very good.
In our last article, we referred to the lack of green (i.e., Net Income and EBITDA). None of these companies can walk the talk.
The tenth illustration relates to Financial Situation. There are four factors we considered: (i) Total Debt-to-Total Equity (ii) EBITDA-to-Interest Expense (iii) Net Debt-to-EBITDA, and (iv) Cash Flow-to-Total Liabilities.
Seven more were in the comfortable range of 1,151 to 1,480 out of 5,021. These scores reflect relatively strong capitalization although that situation may not continue for long if their extremely high burn rates are not appropriately managed.
Some of the big names, Aurora Cannabis (NYSE:ACB) (3,965), Cronos Group (3,969), General Cannabis Corp. (4,501), Medmen Enterprises (OTCQB:MMNFF) (4,621) and Green Growth Brands (4,895), received very low rankings. Too many liabilities and not enough earnings at this point.
The eleventh illustration is of the consensus scoring of all the Analysts who follow the almost 5,100 companies that we score and rank on a relative basis each week based on data from Thomson Reuters.
Nineteen of the 21 companies received an Analyst score.
The ranking out of a universe of 4,307 ran from T1 for Green Growth Brands, which although tied with a couple hundred others was excellent, to 19 among the cannabis companies for Cronos Group at 4,257 in the total company universe, which was not good.
Noteworthy is that fully 10 cannabis companies received scores that those analysts consider good or, as we say, acceptable for investing. Perhaps they were mean speculating.
In time there will be more analysts covering these cannabis companies, and more companies will be covered. The data, scoring and ranking will continually change. If anything, these analysts, like their legal and accounting colleagues, are likely to become more objective and less corporate finance motivated in their assessments.
The 12th and final illustration in our study series is our proprietary composite score for Growth.
On an objective basis, using the raw data at hand, our studies showed that Acreage Holdings, Auxly Cannabis and Organigram Holdings are acceptable for detailed study at this point. However, admittedly those particular scores do go against our biases. We report them here because we rank all companies in our 5,000+ company universe the same way.
We also rank companies for Composite Value and Yield, but in the case of these cannabis companies, only one ranked (and that was less than acceptable) for Composite Value and none for Yield as none pay a dividend.
We believe that as the cannabis industry is in the emerging growth phase that while we will pay attention to our weekly Fundamental scoring and ranking system, our proprietary Technical algorithms will be more important for decision-support reasons for many months to come.
For us, at some point, we do anticipate offering a cannabis portfolio as an option to clients. To get there, we will be relying on the astute independent valuation work of our associates like Hamid Shekarchi of BDO.
Like our readers and clients, we are students of the market. Every week is a learning experience, and we hope this one was for you as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.