Wednesday , 22 May 2019


Fact vs. Fantasy: Only 16 Cannabis Stocks Generate the Data Necessary To Evaluate Them Properly & the Winner Is…?

Of the total 5100 companies we rank weekly there are only 400 that we consider as viable candidates for investment [and of those only 16 cannabis stocks generate the data necessary to evaluate them properly]. For our purposes today, we ranked those companies on Earnings, Balance Sheet, Relative Valuation, and Risk, with each getting a Composite Average Ranking…

The following scores are substantially different than public perception, which is why I labeled this article “Fact vs. Fantasy.”

1. Based on Composite Ratings, only OrganiGram Holdings (OTCQX:OGRMF) (at 6.25 out of a highest 10 score) and Aphria (at 6) had scores typical of S&P 500 company average performance. The other scores ranged from 3 to 5…

Average Score Composite Score Rank Majors Rank
OrganiGram Holdings OGI.V 6.25 1 1
Aphria Inc. APHA.TO 6.00 2 2
CannTrust Holdings TRST.TO 5.00 3 3
Hexo Corp. HEXO.TO 4.75 4 4
Aurora Cannabis TSX ACB.TO 4.50 5 5
Perrigo Co. PRGO, PRGO.V 4.50 6
Cronos Group CRON.TO 3.25 7 6
Canopy Growth Corp. WEED.TO 3.00 8 8
Green Organic Dutchman OTCQX:TGODF, TGOD.TO 3.00 9 7
Canopy Rivers OTCPK:CNPOF, RIV.V 3.00 10
Emerald Health OTCQX:EMHTF, EMH.V 3.00 11
Supreme Cannabis OTCQX:SPRWF, FIRE.TO 3.00 12
Auxly Cannabis OTCQX:CBWTF, XLY.V 2.75 13 9
Flowr Corp. OTCPK:FLWPF, FLWR.V 2.00 14
Tilray TLRY 1.75 15 10
Pharmacielo PCLO.V 1.00 16

2. Relative to Earnings, only OrganiGram (10) and Aphria (9) were acceptable on that basis.

Earnings
OrganiGram Holdings OGI.V 10
Aphria Inc. APHA.TO 9
Perrigo Co. PRGO.V 5
Hexo Corp. HEXO.TO 4
CannTrust Holdings TRST.TO 1
Aurora Cannabis TSX ACB.TO 1
Cronos Group CRON.TO 1
Canopy Growth Corp. WEED.TO 1
Green Organic Dutchman TGOD.TO 1
Canopy Rivers RIV.V 1
Emerald Health EMH.V 1
Supreme Cannabis FIRE.TO 1
Auxly Cannabis XLY.V 1
Flowr Corp. FLWR.V 1
Tilray TLRY 1
Pharmacielo PCLO.V 1
Canopy Growth NYSE CGC 1

3. Based on the Fundamentals strength (based on Profitability (revenue growth, gross and net margin and return on equity), Debt and Earnings Quality (free cash flow, and days of sales in inventory and receivables). the acceptable companies were CannTrust Holdings (9 out of a highest 10) followed by Aphria (8), Aurora Cannabis (8) and OrganiGram (7).

Fundamentals
CannTrust Holdings TRST.TO 9
Aphria Inc. APHA.TO 8
Aurora Cannabis TSX ACB.TO 8
OrganiGram Holdings OGI.V 7
Perrigo Co. PRGO.V 5
Hexo Corp. HEXO.TO 5
Cronos Group CRON.TO 5
Canopy Growth Corp. WEED.TO 5
Emerald Health EMH.V 4
Supreme Cannabis FIRE.TO 4
Auxly Cannabis XLY.V 4
Green Organic Dutchman TGOD.TO 3
Canopy Growth NYSE CGC 3
Flowr Corp. FLWR.V 2
Tilray TLRY 2
Canopy Rivers RIV.V 1
Pharmacielo PCLO.V 1

When I hear or read about the grandiose performance these companies are going to have two or three years out, I tune out but, if the Earnings and Fundamentals Ratings are acceptable and improving, then on a trading basis I think the interest level for any company in this industry is justified.

4. Based on Relative Valuation to the broad market, (based on (most importantly) Price-to-Sales plus (equally) Trailing P/E and Forward P/E) none were truly acceptable to conservative investors; however, Canopy Rivers (scoring a 6) came close for consideration. In the case of almost every cannabis company, the valuation multiples were awful.

Relative Valuation
Canopy Rivers RIV.V 6
Canopy Growth NYSE CGC 4
CannTrust Holdings TRST.TO 3
Supreme Cannabis FIRE.TO 3
Aurora Cannabis TSX ACB.TO 2
Perrigo Co PRGO.V 2
Hexo Corp HEXO.TO 2
Cronos Group CRON.TO 2
Canopy Growth Corp WEED.TO 2
Emerald Health EMH.V 2
Auxly Cannabis XLY.V 2
Green Organic Dutchman TGOD.TO 2
Flowr Corp. FLWR.V 2
Aphria Inc. APHA.TO 1
OrganiGram Holdings OGI.V 1
Tilray TLRY 1
Pharmacielo PCLO.V 1

5. Based on Risk, (which looks at 5-year and 90-day stock performance measures, including volatility, magnitude of returns, beta and correlation of returns to the S&P 500) the only acceptable companies were Hexo (8), which was the least risky, followed by CannTrust, Aurora Cannabis and OrganiGram, each of which scored an acceptable 7 out of 10…

Risk
Hexo Corp HEXO.TO 8
CannTrust Holdings TRST.TO 7
Aurora Cannabis TSX ACB.TO 7
OrganiGram Holdings OGI.V 7
Perrigo Co. PRGO.V 6
Green Organic Dutchman TGOD.TO 6
Aphria Inc. APHA.TO 6
Cronos Group CRON.TO 5
Emerald Health EMH.V 5
Canopy Rivers RIV.V 4
Supreme Cannabis FIRE.TO 4
Canopy Growth Corp. WEED.TO 4
Auxly Cannabis XLY.V 4
Flowr Corp. FLWR.V 3
Tilray TLRY 3
Canopy Growth NYSE CGC 2
Pharmacielo PCLO.V 1
Comments
I happen to believe that Canada is well-positioned to soon be crushed by global competition in the rapidly evolving cannabis industry. In fact, sadly, I believe that Canada will become the example to the world of what not to do to build a sustainably successful cannabis industry. Speaking as a Canadian, our cannabis industry will probably one day be a Harvard Business School case study… the biggest flop of first-mover advantage since Napster. The best of them will be taken over and the rest will rot.

…Canada is now in a financial bubble for cannabis…[Once] the U.S. has federally legalized cannabis…the U.S. industry will then see a lot more ​investment which will flow out of Canada. Soon the world will have legalized cannabis for personal, recreational use or for medical use, and American capitalists will take control.

TGOD (Green Organic Dutchman) is one that will make it and thrive long-term and I own the stock. The only one I own. They have the best grower, solid management and Tim Seymour on their board. HEXO also should be good, but their CEO is terrible. They have a lot of greenhouse capacity that produces bunk weed. HEXO’s value is in its relationships with government and Molson (TAP). They are a take-over target…

Conclusion

Everybody seems to have a different view of cannabis, and many are highly opiniated. For me though, as an investment pro, I just stick to observations and analysis based on Big Data. My bottom line on the subject: most exchange-listed cannabis companies are terrible businesses that I will not invest in. Personally, I’m waiting for the right time to buy put options.

Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement. The author is receiving compensation from Seeking Alpha for pageviews of his original article as posted there so please refer to it for the unedited version.] 

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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