RE:PS Ratio Pricingquinlash - (6/2/2021 4:39:42 PM)
PS Ratio Pricing I am seeing a PS-Ratio of 24.8 on Canopy after todays trading however HEXO with the same PS-Ratio would be at $29.50.
To say the stock is undervalued based on peers within the market is an understatement IMHO
What TD Waterhouse shows today is: Hexo 9.1 and Canopy 20.2 (it's a dynamic number) Anyone who knows anything at all about the PS Ratio, knows that the lower the number - the fairer the current value of the share price - and a higher PS Ratio number means the stock is likely overvalued.
Currently, almost all cannabis stocks have a high PS Ration - and I think everyone agrees that the sector, in general is over valued.
Doesn't mean that investors aren't willing to pay the higher sp - it just means that the price is overvalued based on the numbers in the calculation (which is simply current share price divided by sales (for the preceding 12 months).
A simple Google search will show you the following:
What Is a Good Price-to-Sales (P/S) Ratio?
Price-to-sales (P/S) ratios between one and two are generally considered good, while a P/S ratio of less than one is considered excellent. As with all equity valuation metrics, P/S ratios can vary significantly between industries. It's important to view a company's P/S ratio in comparison to similar companies within the same industry.
The Price-to-Sales Ratio
The P/S ratio is an investment valuation ratio that shows a company's market capitalization divided by the company's sales for the previous 12 months. It is a measure of the value investors are receiving from a company's stock by indicating how much are they are paying for the stock per dollar of the company's sales. Analysts prefer to see a lower number for the ratio. A ratio of less than 1 indicates that investors are paying less than $1 per $1 of the company's sales. Any number higher than 4 is commonly considered unfavorable.
So when Queen says Canopy has a PS of 24.8 (share price today closed at $30.76) - it's not necessarily a good thing. It's a high PS Ratio which suggest that $30.76 is overvalued, and a new investor should be aware that $30.76 may not be a good buy.
Why Queen feels that Hexo (current sp price of $8.65 - with a PS Ratio of 9.1) should be converted to the same as Canopy's is the same as saying - "if Hexo was overpriced like Canopy, that share price would be $29.50."
It's a silly statement - why do you want Hexo to be overvalued to new investors - like when the share price was $14 a short time ago, investors are now kicking themselves for having bought?
What you want to determine as an investor is whether a company's share price is over or udner valued - not what it would be if it was converted to a company with a higher PS Ratio (like Hexo to canopy)
THE SMARTER CONVERSION THEN is not Hexo (9.1) to Canopy (20.2), but Canopy to Hexo as Hexo has the lower PS Ratio - and then is likely more fairly valued.
To convert Queen's above statement then:
"I am seeing a PS-Ratio of 9.1 on Hexo after today's trading however Canopy with the same PS-Ratio would be at $13.85"
NOW - you can compare Hexo to canopy - and possibly vcalue Hexo closer to $13-$14 (just like some of the analysts).
Remember though that for a comparison to be really fair - the two comapnies should have roughly the same market cap and the same annual sales.
If one is priced at $14 and the otehr at $8 - you can drill down further to try and determine which is the fairer share price
The EV Ratio adds in debt etc considerations - which the PS Ratio doesn't