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It is important to be able to determine a company's financial performance and ability to keep growing and the three metrics in this article do just that - offer a comprehensive approach towards selecting fundamentally strong value stocks. Specifically, we apply them to the 5 Canadian LPs and 13 American MSOs in our Pure-play Pot Stocks Index.

The three metrics are:

1. Operating Cash Flow

Without positive operating cash flow (i.e. money involved directly with the production and sale of goods from ordinary operations) a business doesn’t survive. Very simply, cash flow is the best measure of a company’s financial and operational health.

2. The Piotroski F Score

The Piotroski F Score is a financial rating system that calculates a comparative score of a company’s inherent value based on fundamental analysis to help an investor find the best crème de la crème value stocks with the most significant potential gains. In back-testing the stock market from 1976 to 1996 the Piotroski F Score it showed that it would have beaten the average return on the stock market by 13.4%.

According to the Piotroski F Score there are 9 conditions one should look for in a value stock, and for each condition that’s fulfilled, one point to the stock’s total score so the Piotroski F Score for a company can be between 0 and 9. Companies at the bottom of the scale (0-3) can be considered companies with weak fundamentals and companies at the top of the scale (8-9) have powerful fundamentals and are most likely to keep performing well in the future.

From a technical point of view, the Piotroski F Score is 100% accurate but unforeseen events like an economic downturn, a recession (or even a once-in-a-lifetime global pandemic), can cause stocks to plummet regardless of what anyone’s fancy models or indicators predict yet, ignoring any extreme situations, there is likely quite a lot of merit to the Piotroski F Score.

3. The Altman Z-score

The Altman Z-score is a numerical measurement used to predict the chances of a business going bankrupt in the next two years and has an accuracy that ranges from 82% and 94%. If a company shows a Z-score closer to 3, investors may consider purchasing the company’s stock since there is minimal risk of the business going bankrupt in the next two years. However, if a company shows a Z-score closer to zero, the investors may consider selling the company’s stock to avoid losing their investments since the score implies a high probability of going bankrupt.

The above metrics have been applied to the 5 Canadian Cannabis LPs (see here) and 13 American Cannabis MSOs (see here) as tracked by the munKNEE Pure-play Pot Stocks Index and are presented below, in descending order, as to their financial and operational health:
 

1. Green Thumb (GTBIF):
   • Positive Operating Cash Flow: Yes - #1 (see here)
   • Piotroski F Score: 6
   • Altman Z-Score: 2.5 (i.e. 13% chance of operational distress within the next 2 years)
2. Verano (VRNOF):
   • Positive Operating Cash Flow: Yes - #2
   • Piotroski F Score: 5
   • Altman Z-Score: 1.3 (59% chance of financial distress)
3. Trulieve (TCNNF):
   • Positive Operating Cash Flow: Yes (marginal)
   • Piotroski F Score: 5
   • Altman Z-Score: 1.6 (67% chance of financial distress)
4. Cresco (CRLBF):
   • Positive Operating Cash Flow: Yes (marginal)
   • Piotroski F Score: 4
   • Altman Z-Score: 5.3 (71% chance of financial distress)
5. Cronos (CRON):
   • Positive Operating Cash Flow: No
   • Piotroski F Score: 8
   • Altman Z-Score: 15.2 (less than 1% chance of financial distress)
6. Organigram (OGI):
   • Positive Operating Cash Flow: No
   • Piotroski F Score: 7
   • Altman Z-Score: 3.1 (less than 1% chance of financial distress)
7. Planet 13 (PLNHF):
   • Positive Operating Cash Flow: No
   • Piotroski F Score: 7
   • Altman Z-Score: 4.2 (37% chance of financial distress)
8. Curaleaf (CURLF):
   • Positive Operating Cash Flow: No
   • Piotroski F Score: 5
   • Altman Z-Score: 1.9 ((59% chance of financial distress)

The remaining 10 stocks in the Index do not have positive operating cash flows, have Piotroski F Scores of 4 or less; and have Altman Z-Scores of less than 1 and, as such, are deemed by this analysis to not have very high prospects going forward.

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