Comparing the ‘Cannabis 50’ to the S&P 50

This week we compare many corporate fundamentals of the ‘Cannabis 50’ companies to the largest 50 of the S&P 500 companies.

If we are going to buy, sell or hold the stocks, then we ought to understand how they stack up to the world’s best-known companies. In fact, for both sets of 50 companies we rank the fundamental scores derived from Thomson Reuters raw data, our Big Data supplier, against a full list of 5091 companies that are also listed in many international markets.

We capture the data and apply it to a proprietary algorithm to generate portfolio management decision-support information. The analysis done for this article is a part of our research.

From a growing number of cannabis companies, we created the Bill Cara Cannabis 50, which we are preparing to trade professionally. As more cannabis companies meet their regulatory requirements and more industry analysts report on them, our database will expand and there will be a turnover both in this list and as candidates for our portfolio.

Here are lists of the Cannabis 50 and the S&P 50.

For the exhibits, we used the US stock market tickers for these companies, but this exhibit also contains the Canadian market tickers and the links to the company websites for each of the Cannabis 50.

EXHIBIT A (Cannabis 50)

EXHIBIT B (S&P 50)

Here is a sample of the fundamentals data that we obtain and massage every week.

• 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 about 5,100 companies to get relative rankings of any stock against the Universe or perhaps its sector or within any peer group that we choose such as a portfolio or a group of stocks in an industry like cannabis.

On the fundamentals data that we receive, we apply a proprietary algorithm to compute relative scores for categories like Growth, PEG, EPS and Revenue Revisions etc, some of which are displayed in this article as exhibits.

Here is a background explanation of the Williams Market Analytics Fundamental Scoring System and our Fundamentals algorithm

Scores range from 0 (weakest) to 100 (strongest) and are centered around 50, like a diffusion index, as explained below. The number in parenthesis is the company’s percentile rank for the metric, either versus all listed companies (“Global”) or versus its peers (“Sector”). The 100th percentile is top of class.

NA = Fundamental data is not available for the company or there is a lack of analyst coverage.

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 detailed scoring results of the

Bill Cara Cannabis 50

.

Exhibit 1 is of Growth.

From the description of the Fundamentals algorithm, you will note that our Growth score is based on both Revenue and Earnings calculations.

For statistical reasons, we apply a maximum score of 100 to all 5,000+ companies, for all calculations. This methodology resulted in Cannabis Wheaton Income Corp having a 100 score for Growth and hence receiving a T1 (tied for #1) ranking.

But you will also see that 22 of the Cannabis 50 beat the Growth scores of any S&P 50 company. That is particularly notable in that almost no cannabis company has much in the way of earnings. That result reflects the explosive revenue growth in the cannabis industry, but also in the reduction in the size of the financial losses, which contributes to a higher score.

Of the 50 cannabis companies, there was insufficient data to calculate scores on 12. But of the 38 we were able to score, fully 36 of these companies scored more than 50.0, and 15 of the 50 scored higher than 75.0, which is extraordinary. Growth is the reason so many investors are watching the cannabis industry closely.

The lowest Growth score that we would deem acceptable for investment was probably Charlotte’s Web at 60.69, which stood at 844 out of 4,238 ranked companies this week (May 24 data). Note also that we tightened up our scoring system this week.

Note that the database universe is almost 5100 companies but the scoring universe for each exhibited criterion is less than 5100 because the reported data from the companies and/or the analysts was insufficient for our purposes. In fact, for the emerging cannabis industry we were unable to analyze several criteria that we do every week for mature companies, such as Yield, because in that case dividends are not paid by these fast growth companies.

Exhibit 2 is for Price-Earnings Growth.

Earnings matter but these scores are based largely on analyst estimates, which are highly influenced by company guidance and reflect the lessening of projected financial losses. However, when subsequent operating results fail to meet consensus estimates, which for cannabis are truly mostly guesswork, the stock prices get hammered.

As we continue to say, cannabis companies can either walk the talk that investors are led to expect, or they cannot. Because of ego and over-striving by management, most companies try and fail.

The highest scored companies for PEG scores were Sunniva Inc. (SNNVF), Invictus MD Strategies Corp (IVITF) and Eve & Co Inc (EEVVF), which was like the scores of a week earlier.

Aphria jumped up, followed by last week’s next group of leaders: Green Thumb Industries Inc. (GTBIF), Green Growth Brand (GGBXF) and Zenabis Global Inc (ZBISF).

To determine the best candidates for investment based on company fundamentals, we look at the scores of all these exhibits. Prior to investing, we then run different market price-based algorithms. However, analysis of all the data results in anomalies in some categories that require deeper analysis.

We have noted previously that some of profit-generating cannabis companies are being acquired by larger companies for accretive valuation reasons. In any case, profits will come from a lower cost of production and (probably) rising revenues and by delivering products that consumers want.

Exhibit 3 is for EPS Revisions.

Once again, bear in mind that we are not referring to absolute earnings here. When companies guide from a major loss to a lesser loss, the analysts take note.

In any case, many cannabis companies top the leader board.

Many also, cannot be scored.

On this EPS Revisions basis, 31 of the 50 companies received a score, but only 12 were acceptable for additional study.

The best two were Flowr Corp (FLWPF) and Corbus Pharmaceuticals Holdings Inc (CRBP), while the 12th best was Curaleaf Holdings, Inc. (CURLF). Next best, Innovative Industrial Properties Inc (IIPR) was close.

But the best of the rest scored only a 2813 ranking in the universe of 4,171 companies that received scores for this measure. That was CannTrust Holdings with a ranking of 2813. The others received very poor rankings.

Exhibit 4 is for Revenue Revisions.

Of the 83 companies that we were able to score on this basis, from a universe of 4142 companies, there were five with the maximum 100 score. Of these, take note that if the company was not Disney and produced the film named Avengers, the S&P 50 did not make it into the Top 13.

McDonalds was next at #14, followed by two more cannabis companies and then Apple, salesforce, Microsoft and Boeing. But that’s still 15 of the Cannabis 50 that were flying higher than Boeing.

The four cannabis leaders were: MediPharm Labs Corp. (MEDIF), Emerald Health Therapeutics (EMHTF), Curaleaf Holdings (CURLF), and Kush Bottles (KSHB).

Note that we are using the US ticker symbols. Most of the Cannabis 50 are also traded in Canada with different ticker symbols.

There were 17 out of the Cannabis 50 that we could score and rank on the basis of Revenue Revisions.

Exhibit 5 is for Valuation, which we based on the consensus analyst estimates of Enterprise Value (EV) to EBITDA and EV to Sales.

Five of the 100 companies in the study that topped the Valuation factor board were cannabis companies, which was a bit surprising. However, if investors continue to sell off their cannabis holdings as they have been, then Valuation does become more attractive.

Insys Therapeutics (INSY), Invictus MD Strategies Corp (IVITF), Delta 9 Cannabis (VRNDF), WeedMD (WDDMF) and Harvest One (HRVOF) are now up there with the likes of UnitedHealth (UNH), Berkshire Hathaway (BRKB) and Wal-Mart (WMT) in terms of Valuation attractiveness.

Exhibit 6 is for the Price-to-Earnings Ratio (PER) .

We were able to score and rank only half of the Cannabis 50 companies on the basis of Price-to-Earning Ratio; however, Invictus MD Strategies Corp (IVITF) was atop the leaderboard and WeedMD Inc (WDDMF) was close at #7.

These two received rankings of 164 and 487 out of the scored universe of 3369 companies, which was quite acceptable.

As noted previously, we believe the scores for many cannabis companies have benefited from estimates of 2019 and 2020 earnings that are unlikely to come true.

Exhibit 7 is for Market Cap to forecasted EBITDA.

When looking at EBITDA, where are the earnings? Of the scores we received, none of the cannabis companies would be acceptable on an investment basis. Market prices are simply excessive and there is little to no projected EBITDA.

In any case, of the 100 companies in the study, Delta 9 Cannabis (VRNDF) did rank up at #9 and WeedMD (WDDMF) was #19. Those were excellent rankings.

Exhibit 8 is related to Book Value.

A quick look through the top half of the 100 companies in the Book Value study, it is hard to miss the huge number of cannabis companies. In fact, one of them, Innovative Industrial Properties Inc (IIPR), received the highest score we give out and 29 of the top 35 are cannabis companies.

In the universe of 5028 scored companies for Book Value, 30 of 50 cannabis companies scored above 50.0, putting them into the Top 40 of 100 in this study. This means that over half the cannabis companies have outstanding book value per share relative to their market valuations.

Exhibit 9 is for Profitability.

For Profitability, the best two cannabis companies are Charlotte’s Web (CWBHF) and Innovative Industrial Properties Inc (IIPR), which ranked #537 and #1051 of the 4899 companies we monitored and were able to score this week.

In this list of 100, that ranked these two at #28 and #35, far down the list of superior S&P 50 companies, which is not a good result. Of course, cannabis is a new industry and must manufacture and sell a physical product rather than an electronic service like the Alphabet’s, Broadcom’s and Visa’s.

In any case, I believe that the score for Charlotte’s Web (CWBHF) would be deemed acceptable for investment purposes based on the Profitability factor. And note that it was only a week ago, we wrote: “While just one of the 50 (cannabis) companies received an acceptable Profitability score Charlotte’s Web (CWBHF) was close with a 1219 ranking (improved this week from 1221) out of the universe of 4807 that we were able to score.” That other company was a disappointment to their investors this week.

Only 14 of the 50 cannabis companies received Profitability scores in the top 50% of companies in the 4899 universe and most were very lowly ranked. Herein lies a problem with a widely held market perception that has been tied to growing capacity for the companies that have cultivation and sales licenses. We have written about this before: growing cannabis is not like growing lettuce. These companies can employ all the PhD’s and agriculture scholars they want for marketing purposes; but almost none of them can compete with the grey/black market for low cost of production and product quality.

Investors are wondering why, in many cases, cannabis products are not selling? For some companies, inventory is building simply because knowledgeable clients will not accept poor quality and excessive prices no matter how beautiful the packaging.

In a recent article, we referred to the lack of green (i.e. Net Income and EBITDA dollars). Very few of these companies can walk the talk.

Exhibit 10 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.

Of 5062 companies monitored and scored based on Financial Quality, there were 34 cannabis companies that scored above 50.0, which is a good result. Fully 19 received a score of 70.0 or better, which is outstanding.

If speculators investigate the data here, they will find many to be worthy of a buy-and-hold decision – if the entry position is from low in the price cycle.

MediPharm Labs Corp (MEDIF) received our maximum score for their Financial Situation. Three others scored above 90.

Of the universe of 5062 scored companies, some of the big names ranked extremely low. In fact, Tilray Inc (3328), Cronos Group Inc (3712), Aurora Cannabis (4186), Medmen Enterprises (4194), Green Growth Brand (4567) and General Cannabis Corp (4757) all received very low Financial Quality rankings. Too many liabilities and not enough earnings at this point.

Exhibit 11 is of the consensus scoring of all the independent Analysts who follow the almost 5100 companies that we score and rank on a relative basis each week based on data from Thomson Reuters.

We have a bone to pick with many of the analysts who follow these young cannabis companies. They rate them far too high. They are participating in and possibly even driving the industry hype.

Analyst ratings are not our scores or rankings. We are analyzing and reporting data based on what the industry analysts are reporting to Thomson Reuters, and Thomson Reuters is just publishing it, so please don’t shoot the messengers.

Fully seven of the Cannabis 50 received maximum 100 scores from industry analysts. Obviously, we are not included in this parade that we call a charade.

Four more, which is now 11 of the 50 cannabis companies, received an analyst score above 85. UnitedHealth Group (UNH), a perennial Wall St favorite, received a score of 83.52 (#1 of the S&P 50 but only #12 of this list of 100).

Then three more cannabis companies, all with analyst rating above 80.95, were higher ranked than the #2 S&P 50 companies, Merck and Amazon, which tied with an 80.36 score.

Reminds us of the 1999-2000 new Internet industry that emerged with analyst ratings that surely aided and abetted their sales colleagues. Three years later, half of the best of the best – from Goldman Sachs nonetheless – were bankrupt. So, speculators, beware of salespeople in analysts clothing.

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 increasingly objective and less promotionally oriented in their assessments.

Exhibit 12 in our study series is our proprietary Composite Score for Growth.

Please note that the WMA research data that has been used for the following exhibit also applies a market price factor in its Growth Composite rating. As a result, you will find that the Top 15 of the 100 that we have under review are cannabis companies.

That is the market speaking. When the market is rising, the cannabis boat will lift faster and higher. When the market is falling, that boat will be the earliest ones in trouble.

We were able to rank 98 of the 50 companies of a ranked universe that totaled 5091. Two, SugarBud Craft Growers Corp (RLLRF) and Westleaf Inc (WSLFF), failed to score.

There were only 21 of the Cannabis 50 that received Composite Growth scores above 50 in the universe of 5091; 15 were above 60; 11 were above 70; and five scored from 80.59 up to MediPharm Labs (MEDIF) at 86.11.

MediPharm in fact ranked #5, Flowr Corp (FLWPF) ranked #10, and Charlotte’s Web (CWBHF) ranked #16. Out of 5091 companies, these rankings are impressive.

Of course, there are some big names in the cannabis industry that ranked very low. Much lower than their street reputation.