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Part of cannabis and investing

What are we looking for?

Cannabis producers that are of sound investment quality and have reasonable valuations.

The screen

Canada’s fast-approaching legalization of recreational cannabis, not to mention the recently skyrocketing shares of Tilray Inc., continues to spur investor interest.

Our search targeted established Canadian producers with sound prospects. We then applied our Cannabis Quality Ratings (CQR), explained below.

We found a number of firms that offer investment quality. Not surprisingly, reasonable valuations were nowhere to be found in this white-hot industry. Almost all producers need huge revenue growth to match market capitalizations. All could plunge if momentum investors flee.

Conservative investors should avoid cannabis stocks. Highly aggressive investors who want to hold cannabis producers could venture into this area, but stick with the highest-quality shares possible.

Our CQR system awards points to a stock based on key factors:

  • Rising and diversified revenue;
  • Cost-competitive production;
  • Sound balance sheet;
  • International operations;
  • Industry prominence;
  • Free from dependence on a single customer;
  • Prominent clients or partnerships;
  • Market cap in line with sales;
  • Focused on organic growth, not acquisitions;
  • Stock gains in line with market averages;
  • Operates largely outside the intense pressure of the broker/media limelight.

Our Cannabis Quality Ratings range from a 5-Leaf CQR (highest) score to a 1-Leaf CQR. Cannabis producers with most if not all of the above factors earn a 5-Leaf CQR score for their sound investment quality and reasonable valuation compared with their current price and market cap.

Companies with many of these factors receive a 4-Leaf or 4.5-Leaf CQR. That means they offer reasonable investment quality, but are somewhat overvalued at their current price and market cap.

Companies with a 3-Leaf or 3.5-Leaf CQR have a few of those key factors, which suggests they have reasonable investment quality. Still, they are likely overvalued at the current price and market cap.

Companies with a 2-Leaf or 2.5-Leaf CQR have a number of investment flaws and are very likely overvalued at the current price and market cap.

Companies with a 1-Leaf or 1.5-Leaf CQR have little investment quality and are almost certainly overvalued at the current price and market cap.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor. The TSI Cannabis Investing Bulletins is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Our CQR system generated eight stocks. Leaders Canopy Growth Corp. and Aphria Inc. are well-positioned across the Canadian cannabis industry and internationally. Aurora Cannabis Inc. and CannTrust Holdings Inc. are expanding on their medical marijuana expertise. Tilray’s U.S. listing is fuelling outsized share-price gains. New Brunswick’s Organigram Holdings Inc. and Quebec’s Hexo Corp. have refocused nationally. Ontario’s Emblem Corp. aims to do the same.

We advise investors to do additional research on investments we identify here.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

Select cannabis equities

Ranking* Company Ticker Market cap ($Mil) Recent Price ($) 1Yr Total Return (%)  Cannabis Quality Rating
1 Canopy Growth  WEED-T 14,196.0 63.46 488.1 3.5
2 Aurora Cannabis  ACB-T 10,421.3 10.87 291.0 3.5
3 Aphria Inc. APH-T 4,242.2 19.28 181.1 3.5
4 CannTrust Holdings TRST-T 1,268.7 12.02 264.2 3.5
5 Tilray Inc.** TLRY-Q 16,375.6 214.06 856.1 3.5
6 Hexo Corp. HEXO-T 1,570.1 8.10 422.6 3.0
7 Organigram Holdings OGI-X 958.5 7.00 144.8 3.0
8 Emblem Corp. EMC-X 219.4 1.66 -11.2 3.0

Source: Dividend Advisor

*Ranking is determined by TSI Cannabis Quality Rating Score. Where overall points are the same, analysts considered company valuation and outlook to decide final placements. 

** Tilray share price and market cap are in US$.