My Most Comprehensive Cannabis Update Yet (Part 2)
Alright, let’s pick up where we left off a couple of weeks ago!
In case you missed it, I encourage you to read my Most Comprehensive Cannabis Update (Part 1), in which I shared a high-level overview of the industry’s main trends:
In today’s Part 2, we’ll dive into some of the individual names I like the most and why. My goal is to share a few differentiated insights on each, rather than writing a whole investment thesis. In each case, I’ll try to direct you to a more detailed presentation where you can learn about these companies.
Also, please keep in mind that my investment horizon may vary by company and may differ from yours.
Let’s dive in!
My Top Pick: Cannara Biotech (TSX-V: LOVE)
To learn more, you can listen to this recent fireside chat I did with Nicholas Sosiak, Cannara’s CFO:
My major foray into the Canadian cannabis sector began when I purchased Cannara shares in December 2024 (through the Rivemont MicroCap Fund). My initial thesis was simple: the company was growing revenues at 25%+ per year, was profitable, was trading at a very low multiple of free cash flows, and held enough real estate on its balance sheet to protect the downside completely.
After buying a starter position, I began conducting classic Peter Lynch-style research, digging deeper into the entire sector. I interviewed several management teams, spoke with suppliers, employees (below the C-suite), and other investors. My goal was to map out the industry and figure out which LPs were considered the strongest. Time and again, Cannara came up as a best-in-class competitor among its peers.
‘‘The ultimate commendation is when a company talks positively about a competitor. I always put a strong weight on such a view.’’
– Anthony Bolton, former Fidelity fund manager
To me, hearing competitors and other industry insiders talk so positively about Cannara was significant validation.
It’s hard to compete against Cannara for several reasons. Here’s why:
Low-cost inputs: 70% of the costs of cultivating cannabis are electricity and labour. In Quebec, Cannara benefits from the lowest electricity costs in Canada and some of the most affordable labour costs.
State-of-the-art facility: Cannara owns and operates one of the most sophisticated cultivation facilities in Canada. The Valleyfield facility was built for over $250 million by another LP before it was repossessed by the bank and subsequently liquidated. Cannara bought it for 10 cents on the dollar ($27 million) in 2021.
Relationship with the SQDC: Everyone I’ve spoken to has confirmed that it is very challenging to compete in the Quebec market if you’re not based in the province. The SQDC, a government-owned provincial retailer, tends to support local LPs. Cannara is currently the second-largest LP in Quebec, a market where competition is significantly limited compared to other provinces.
Strong management team: Cannara’s team has proven its ability to execute, ramping net revenues from $2 million in 2020 to over $100 million in the last twelve months, while maintaining profitability for four consecutive years. I’ve heard (and witnessed myself) that Cannara’s team likes to do things differently than most other LPs and thinks outside the box. Since the success of a microcap company often relies on the quality of its management team, I believe shareholders are well-served in this regard.
A short-term catalyst that investors can watch for is the launch of the new vape category in Quebec next week. The SQDC will initially carry only 25 vape SKUs, and Cannara has secured 5 out of these 25 listings. I expect this category to make a significant contribution to Cannara’s growth over the coming quarters.
Now, what could hold the company back, you ask?
The primary challenge for Cannara has been and will continue to be expanding outside of Quebec. The company has a 12.5%+ market share in Quebec but only 3.8% nationally (as of June 2025). Continued revenue growth over the coming years will have to come from the rest of Canada.
Considering that Cannara currently utilizes only 50% of its cultivation capacity, the organic growth pathway is straightforward as long as demand for the products continues to increase.
The company has been expanding its sales team and refining its strategy to penetrate the rest of Canada further. Although success isn’t guaranteed, I like my chances here.
Cannara is a long-term compounder that I could see myself holding for the next three to five years.
Premium Organic Quality: Rubicon Organics (TSX-V: ROMJ)
To learn more, you can listen to this recent fireside chat I did with Margaret Brodie, Rubicon Organics’ CEO:
Rubicon has some of the same characteristics I saw in Cannara a year ago.
The company has grown its revenues at a 29% CAGR over the last three years while being EBITDA positive. Its tangible book value sits at $0.60 per share today, which means you can buy the stock at a discount to book and benefit from what I believe is a substantial margin of safety.
However, Rubicon’s competitive advantages are slightly different. Since Rubicon couldn’t rely on scale and the lowest-cost inputs, it has optimized for the highest quality by offering premium and super premium organic products. Quality permeates everything the company does. Its flagship brands, 1964 and Simply Bare Organics, set the highest standards in the Canadian marketplace.
The company is led by a highly skilled management team and a phenomenal board of directors. In fact, I think it’s one of the best boards I’ve seen in a sub $100 million market cap Canadian company.
I like having exposure to the premium and super premium categories in my portfolio. As you’ve probably read before, we are in a K-shaped economy (i.e. the rich are getting richer and the poor are getting poorer). I’ve been noticing a trend toward premiumization in various industries. This was the genesis of my thesis on D-BOX Technologies (TSX: DBO), which is supporting the premiumization of the cinema industry. I’ve been seeing the same phenomenon in the airline industry. Airline companies increasingly frame premiumization (i.e. seat upgrades) as a core strategic pillar driving revenue growth and margin expansion. Cannabis is no different, and Rubicon can provide consumers with that elite experience.
Over the past year or so, Rubicon’s main challenge has been its capacity constraints. The company was essentially operating its Delta cultivation facility (now renamed ‘‘Pacifica’’) at full capacity and relied on third-party growers to meet demand.
The situation recently changed when Rubicon acquired a new facility in Hope, BC (renamed ‘‘Cascadia’’) for $4.5 million. With the facility fully licensed as of last month, the company can now ramp up cultivation at its second site. Ultimately, the Cascadia facility is expected to provide Rubicon with 40% more cultivation capacity.
For 2026, the primary catalysts I’ll watch for will be:
A successful ramp-up of the cultivation at Cascadia (i.e. reaching the company’s high quality standards)
Generating the first revenues from Cascadia in Q2 or Q3 2026
Improving gross margins to 40% or more (from the current 31-34% level)
On this last point, I believe it is a priority for newly appointed CFO Glen Ibbott (the former CFO of Aurora Cannabis) and the rest of the team to enhance the margin profile. Are you truly a premium company if you don’t have premium margins? Rubicon needs to translate its premium quality and premium selling prices into premium financial results, and its management team knows it.
Fittingly, the company announced this week that it secured an additional $4 million in loans from its lender to fund margin-accretive projects at its two facilities.
I like how this story is shaping up, with revenue growth and margin expansion on the menu for 2026.
Rubicon will release its third-quarter financial results this week and will host a conference call on November 13th.
Lowest-cost Producer at Scale: Auxly Cannabis Group (TSX: XLY)
To learn more, you can watch the company’s most recent investor presentation at Planet MicroCap Showcase Toronto:
My friend Maxime Fournelle also pitched the company as his top idea at the conference:
Auxly has been on my radar since I began exploring the industry, but it’s only recently that I’ve come to appreciate the opportunity fully.
Unlike Cannara and Rubicon, which operate at the higher end of the price spectrum, Auxly targets the value-driven, everyday consumer with affordable price points, and it does so very well.
Auxly has grown revenues at a 60% CAGR since 2020 and has established itself as the #3 LP by market share.
Most importantly, Auxly’s Back Forty brand is the #1 brand in the Canadian recreational market.
Why is this important? This means that Auxly was able to home in on a strong value proposition and scale the brand organically, driven by solid consumer demand. In contrast, many other LPs had to rely on acquisitions to gain market share.
According to a recent tweet by Mark E. Merritt, Auxly holds 8 of the top 50 SKUs in Ontario, which is further proof of Auxly’s focused execution. To tie this back to a point I made in Part 1 of this series, the provincial boards and retailers are currently rationalizing the number of SKUs that they carry. The last thing you want is for your sales to be evenly spread out among hundreds of different SKUs. I think Auxly, with its focused roster of high-performing SKUs, will continue to benefit from this market shift.
In terms of assets, Auxly owns a state-of-the-art, large-scale cultivation facility (1.1M square feet) in Leamington, Ontario, and a second facility in Charlottetown, PEI, for its vape manufacturing and product development. The management team thinks Auxly can continue to improve yields and volumes within its existing footprint and has access to additional land for future expansion.
With a gross margin of over 50% and a net profit margin of 21% in its most recent quarter, Auxly has demonstrated its ability to produce cannabis at scale profitably. Its margin profile is one of the most (if not the most) impressive in the industry, despite operating in the highly competitive mass market.
In terms of catalysts, a few things I’ll watch out for are:
Continued revenue and profit growth with its flagship brand, Back Forty (i.e., more of the same)
The launch of a new brand called South Point, which is something I learned about recently (there’s limited information online if you search for it). Apparently, the company is moving upmarket with new unique genetics, different post-harvest processing techniques and new product formats. I like that they’re aiming to expand their addressable market.
The company launched a few Back Forty SKUs in the Quebec market recently and has had success with them so far. As I said before, it is challenging to enter Quebec if you’re not from Quebec, so I’m impressed with Auxly’s success in the province so far.
Lastly, I suspect we might learn more about expansion (CAPEX) projects or other capital allocation moves now that the company generates a significant amount of free cash flows.
Auxly will release its third-quarter financial results this week, on November 13th.
Capitalizing on International Opportunities: Decibel Cannabis (TSX-V: DB)
To learn more, you can watch the company’s most recent investor presentation at Planet MicroCap Showcase Toronto:
Frederico Gomes, Director of Institutional Research at ATB Capital Markets, also pitched the company as his top idea:
Decibel is a bit of a different animal than what I’ve presented so far, and that’s on purpose.
The reason why I like Decibel is that it provides me with the international exposure that the others don’t.
Last year, Decibel made the highly strategic acquisition of AgMedica Bioscience to capitalize on the growing international opportunity. AMedica owned a fully licensed, EU-GMP-certified facility. Obtaining this certification can be a lengthy and expensive process (I’ve heard it takes 1 to 2 years and a few million dollars, for what it’s worth), but it is crucial for exporting to the European market.
Some of the larger LPs in Canada have obtained this license for their own exports. In comparison, smaller LPs tend to utilize third-party certified facilities, such as AgMedica, to upgrade their products to EU-GMP standards before export. There are only a handful of facilities in Canada that offer this service. Think of it as a toll road business with a growing number of cars using it.
The biggest European market is Germany, and here’s what the import picture looks like:
Canada accounts for nearly 50% of those imports.
Not only did Decibel time its AgMedica acquisition well, but even more impressively, they paid an expected 1.6 times EBITDA for it. According to the company’s guidance, AgMedica should produce $30 million in revenue and $4 million in EBITDA this fiscal year. Not bad for an acquisition price of $6.3 million!
While I own Decibel to get international exposure at what I believe is a very cheap price, Decibel also has a strong domestic business, being the #6 player by market share in Canada.
Including the domestic business, management has guided for a total net revenue of $130 million in 2025, with $25 million of adjusted EBITDA and $20 million of adjusted free cash flow. With a market cap and enterprise value of $75 million and $117 million, respectively, we are looking at relatively low multiples here (less than 4x P/FCF and less than 5x EV/EBITDA).
The last thing I’ll mention is that the company will report third-quarter earnings on November 19th and will hold its first-ever quarterly conference call.
I think this is an exciting setup. Here’s something I tweeted this summer:
Think about it. Why would you schedule your first-ever quarterly call if you were about to release bad numbers?
I’ll leave it at that…
Medical Focus: MTL Cannabis (CSE: MTLC)
To learn more, you can watch the company’s most recent interview with Smallcap Discoveries:
Last but not least, my final favorite Canadian cannabis company is MTL Cannabis. I was attracted to it primarily because of its financial profile and because approximately one-third of its business is on the medical side. MTLC operates Abba Medix, the third-largest medical cannabis platform in Canada, and Canada House Clinics, a network of 13 clinics in 7 provinces primarily serving the veteran community. The veteran population is attractive because it is the only medical cannabis population in Canada that the government fully insures (although the recent federal budget introduced a proposal to lower the reimbursement rate from $8.50/gram to $6.00/gram, which could impact MTLC somewhat).
MTL also has a strong business in the Canadian recreational market and is developing its export strategy, particularly in Australia and Germany.
Considering its focus on premium recreational products and medical markets (both domestic and international), which tend to yield juicier margins, MTLC has a very attractive financial profile. In its last fiscal year (ended March 31, 2025), the company grew net revenue by 29%, achieved best-in-class gross margins of 55%, an adjusted EBITDA margin of 23%, and a net profit margin of 8%. Similar to Decibel, MTLC is currently trading for less than 5 times its fiscal 2025 adjusted EBITDA.
As I highlighted in Part 1 of this series, MTLC was able to refinance its debt with a brand new credit facility from TD Bank a few months ago, which will dramatically lower its interest expenses. I view this as a decisive vote of confidence in the business plan and the team.
On the operational side, the company operates three cultivation facilities (two in Quebec and one in Ontario) and is currently building a new distribution center in Montreal. This new facility will unlock efficiencies and centralize some of the operations from the three other sites. Ultimately, this will enable MTLC to reclaim additional cultivation space and internalize more of its cultivation, rather than relying on third-party growers. The company is also undertaking other essential capital projects, including the installation of LED lighting in its cultivation rooms. This is expected to reduce energy costs and improve yields and margins. A summary of the company’s main capital projects can be found in its last earnings release.
Over the next six to twelve months, I expect the financials to be somewhat noisy, considering all these moving pieces. Once everything is in place, the company should be well-positioned for its next growth phase, with a more efficient cost structure and improved margins, ultimately leading to even higher profitability.
MTLC is a relatively under-the-radar opportunity, and the stock is very illiquid. I advise you to exercise caution. Considering the positive transformational changes occurring in the business, along with the proposed negative changes to medical reimbursement rates, I view this as a higher-risk but higher-reward opportunity.
Wrapping it up
There you have it: my five favorite Canadian cannabis stocks!
They all meet my criteria of 20%+ revenue growth, profitability, and a low valuation (they all trade for less than 10 times this year’s free cash flows, by my estimates).
They all have well-established domestic businesses, which I think is key because the international opportunity might not last forever. If some of them can capitalize on it for a while, I’m all for extra profitability. However, I wouldn’t want their profitability to rely heavily on exports.
Lastly, I believe they all have outstanding management teams. In an industry where bad actors have historically been prevalent, I understand the cautious approach most investors take. Nobody wants to be burned twice. I’ve met with these management teams multiple times and visited their facilities (except for Auxly). While my judgment isn’t perfect, what I’ve seen gave me the conviction to invest heavily in the space.
Forget about the legacy LPs that raised and burned through billions of dollars. The new crop of winners has emerged, and I believe this is what I’ve presented here.
Before ending this post, I’ll address a question that many will probably ask: ‘‘Have you looked at XYZ company and why don’t you own it?’’
I actually considered sharing some comments on all the other LPs, but I felt that this Part 2 was already quite lengthy. If there’s enough interest, I’ll be happy to write Part 3 and share more details on my watchlist. If you’re interested in a third post on this topic, please let me know in the comments (or by email).
Now, the stage is set. Sit back, relax, and watch for the upcoming quarterly results. I believe there are interesting times ahead for this industry!
As Hugo Alves at Auxly likes to say, ‘‘we are just getting started.’’
Want more?
Follow along on X or LinkedIn for regular updates on the Canadian microcap market!
If you’d like to invest in small public companies and need help, check out this post.
Disclaimer
This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds shares of Cannara Biotech (TSX-V: LOVE), Rubicon Organics (TSX-V: ROMJ), Auxly Cannabis Group (TSX: XLY), Decibel Cannabis (TSX-V: DB), MTL Cannabis (CSE: MTLC), and D-BOX Technologies (TSX: DBO). Always do your own research and consult a professional before making investment decisions.
Nice article. At first I thought the capacity expansion at LOVE and ROMJ would bring added risk, but the amounts required relateive to the cash they generate is low. And LOVE has a long and gradual expansion plan that can be modified at any point, which I think de-risks it.
Great work, thank you for letting us piggyback on your industry immersion.