A company’s revenue alone doesn’t help you evaluate a company’s stock value or potential. Growth investors want to invest in companies that have significant revenue, proven high growth results, and high growth potential. My price-sales-growth (PSG) score goes a long way in finding value in growth.
On my Cannabis Investor Portal, I list cannabis company’s sales and their price/sales ratios that provide a basic way to evaluate a stock’s value (is it under or overvalued compared to its peers). My PSG number goes a step further by factoring in growth.
How do I find the PSG score?
I start with an annualized revenue number, by taking a company’s most recent quarterly revenue and multiplying it by 4 to come up with an annualized number, or run rate. I prefer this annualized number over a Trailing Twelve Month (TTM) figure because the industry is growing so fast.
I then take this annualized revenue number, compare it to its market capitalization to come up with a price/sales ratio. I then factor in the company’s annualized quarter-over-quarter revenue growth (for example, quarterly revenue growth from Q1 2020 to Q1 2021) to generate a PSG score. The closer the number is to 0, the better the value. Here’s an example:
What you’ll notice is how overvalued the Canadian LPs are compared to the American MSOs (LPs have low revenue and low growth), but let’s compare the larger MSOs. Currently, Columbia Care, Jushi, and Cresco Labs have the lowest annualized PSG score and should be considered the best value based on current price/sales and growth. As you look at 2021 and 2022 numbers, they look even cheaper.
This PSG score is a starting point, not a recommendation to simply buy the stocks with the lowest scores. I plan on using the PSG score as the basis for a much broader formula by factoring in other inputs. Here are some factors I’m considering:
- Total Addressable Market (TAM) and market share
- Profitability (gross and EBITDA margins)
- Enterprise values and ratios (EV/sales, EV/EBITDA)
- Leadership score
- Total cultivation space
- Wholesale – how many stores are they in?
- Total cash
- Investor relations score
- Debt/equity
- Current ratio (short term debt/equity score)
- Social media presence and chatter
- Retail store total
- Brand
- Insider ownership
- The average analysts’ price target
- Price/book
Eventually, I’ll have a score for each cannabis company that uses over a dozen factors to identify value in growth.
This PSG ratio (and future formula updates) is available only to my Patreon members starting at $10/month. Currently, I have 53 companies that are rated and that list will expand each week.
