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MightyMaven (< 20)

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Aphria Produces Astounding Quarter, PE/G Ratio Reads Undervalued



July 21, 2017 – Comments (0) | RELATED TICKERS: ACBFF , CGC

Time to Test the Soundness of Another Writer

Refuse to be Spoonfed by Writers; Analyze Their Analysis for Soundness and Validity
Remember to always think actively when reading articles on how you should invest your money. Just because something is in print form does not make it sound or valid information. It doesn't matter if it has been published or not by an official news source because everywhere you look writers leave out pertinent facts all the time, and without pertinent facts, an investor is missing key bases for understanding if an investment is undervalued or overvalued. That can cause you to miss out on many great opportunities and it can cause you to continue on in a bad investment you should get out of. So don't let anyone spoonfeed you their investment advice and take an active role in critiquing their words. What got my motor running this morning was when I read a story about Aphria that it's PE was "Yikes" high and has a "frothy valuation". While there were a lot of positive points made in the 'article', the writer countered that with the so-called negatives of a high PE ratio. So let's look at how sound that advice was this morning.

Let's Look at Some Proper Context for Talking About PE Ratios
Aphria (APH.TO) (APHQF) According to Fidelity Investments and other webistes, Aphria's PE is 122.75 and their expected earnings growth rate is 333.33%. Do you see what I see? That means the PEG ratio is 122.75/333.33 = 0.3682536825368254. That's right, Aphria's PEG ratio is an extremely low 0.368. While some consider a PEG ratio of 1.0 to be basic fair value, one must look at the industry PEGs for a better indication. PEG value for the pharmaceutical industry is 76.39. What? Really? Yes, according to Fidelity. PEG ratio is PE ratio divided by G growth of earnings. So as a pharmaceutical company, Aprhis is growing enormously more than the industry rate, as the PEG ratios for each show us. Just to match it's stock price and PE ratio to its income growth rate so that it has a PEG ratio of 1.0 would require the stock price to multiply by 2.71 times.That's right. If the price TRIPLED, Aphria's PEG ratio would just be 1.0.  Multiplied out, 2.71 x $4.9099 = $13.33 per share. And that's not giving it the PEG ratio of the industry (a 76) but a PEG ratio of 1.0, matching the PE to the company's expected earnings growth. If you matched it to its historical growth rate, you would have to use a figure 3 times that amount and the price projection of fair value would be closer to $40.00. Using forward earnings is better at this stage as it provides a more conservative valuation of $13.33 that $40.00+-. With revenue growth at 143%, with their improved cost of goods sold, the earnings growth projection has strong support from the top line growth.That's hard for its closest competitors Aurora Cannabis and Canopy Growth to do.

Remember: Scary Buzzwords are not Proper Analysis and They Don't Take It's Place Either
So remember not to be fooled by analysts who claim a PE is crazy high. You must always check to see if it matches its earnings growth rate and if earnings is backed up by good growth in sales. A 200 PE could sound high, but if earnings growth is 400%, then the PE could have another 200 basis points to grow. And just as a PEG ratio can be below the growth rate, really, the other side of the coin is that a PEG ratio can also go ABOVE the growth rate, as is seen by the industry PEG of 76. So don't let any writers scare you out of an investment because of a PE that is higher than most PEs in the market. There's more to the story. If they are playing on your emotions, they like to use fear-evoking words like 'crazy', 'frothy' and 'yikes' to stoke the emotional content away from rational analysis. Check their so-called facts out and remember my admonition that statistics can be made to appear to say anything, and this is another example of that. PE is a statistical ratio. But PE by itself has no context to determine if it is relatively high or low. You cannot compare a PE of a company to the total market or to wrong industries because that's an apple to oranges or pears comparison, and better is an industry-specific comparison and best of all is comparing a company to itself, comparing its growth today versus its sales last year; or by its expected growth rate for the year compared to its current sales. I see that the writer in question did NOT make such a comparison. Beware of writers that leave out such pertinent information from their writing especially when leaving it out helps them make their case for or against investing in a particular stock. You can bet they left it out just for that reason. And leaving it out really is a disservice to you as a reader and investor because it can be really very misleading. Always question writers' motives and look for the proper context that they may have left out. With PE discussions, always look at growth along with it.

When Someone Highlights the T-Bone, Look for the Steak not the Bone:
A last point on Aphria is that the writer had claimed that  $5.5 million in strategic investments was the "culprit" for the earnings loss in the latest quarter, although the income for the year was up almost 1000%. Since when should investors consider a qualified investment as a culprit, as if it was a bad thing to invest strategically for the future. Now if the loss was due to a failure of some product line, then we could call that a culprit and view the earnings loss negatively. However, if the only reason earnngs were negative was because a decision was to make a wise investment that will in turn produce sales and earnings for the future quarters, a wise investor will not allow themselves to be thrown off by the negative in earnings. You wold look at EBITDA, or you could simply add back the amount of the strategic investment of $5.5 million to see what the earnings would have been had they not made that investment. Earnngs would have been $3.5 million. Then you could calculate the earnnings for the year the sam way to see what annual earnings would have been. Since they had $3.3 million in profit, adding $5.5 million to that would have given them $8.8 million. Now you can take that a step further and calculate the growth rate for earnings which would be much higher than 955%, more like 2000%. Then you could recalculate their PE ratio, so instead of a PE of 122, you would have 3.3/8.8 (PE of 122) = 45. Now this is what the management of Aphria was looking at as they made their decision to go ahead and take earnings proceeds and invest strategically. If they wanted to just look awesome to investors, they could have just left off with making that investment of $5.5 million and waited on it until the next quarter or taken a loan against that cash using the loan to separate the investment from earnings, they would have looked and been very sound financially, but they wouldn't have had the strategic investment, either. You want a company you invest in to make the right decision on this kind of thing, and honestly smart investors know how to apply the math as I did above and figure out the real substance of Aphria's quarter and not be misled by the inital glance at the quarterly results like the writer this morning was. You want your company you invest in to go ahead and make that strategic investment and you can recalculate all the statistics as I did above to see just how good their quarter was. If the writer had done us a good service, he would have told us that without that strategic investment, Aphria was up 2000% annually.

The CFO of Aphria is a very brilliant man. The Tetra Bio Pharma (TBP.CN) (TBPMF) board is happy to have him.The companies they invest in are happy to have Aphria on board and gain from their all-around advice, including that of the CFO. I think I'm also going to just be happy with the CFO of Aphria, with their investments in other companies, with their strategic investments, and with their amazing growth and transformation with the help of Tetra Bio Pharma into a leading pharmaceutical grade cannabis company. Remember Let the Buyer Beware because it applies to advice you pay for and advice you get for free. And watch out for writers who walk up to you with a spoon in hand. Pull out your knife and fork.

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