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Friends,
Three weeks ago, I called out another big win for New Cannabis Ventures in a Canadian LP, Village Farms. It has not been the first Canadian LP whose low valuation we have discussed in this newsletter, but the run was incredible (and for good reason). My own style gravitates towards identifying cheap stocks that look attractive and avoiding expensive ones: Usually, I would just take the gains in a situation like Village Farms, which is now up 46.6% year-to-date, which is much better than the overall cannabis sector, which has seen a 22.2% drop in 2025 in the Global Cannabis Stock Index.
As of last evening, my model portfolio at 420 Investor was 41% Canadian LPs, and today I want to explain further about why investors who want exposure to cannabis should be open to some of the names. I explain first the valuations, which seem low. Then, I discuss how things might improve. Finally, I warn against buying all Canadian LPs. I also discuss the continuing challenges in the MSO sector.
Canadian LPs Seem to Be Cheap
Village Farms, which I still hold in my model portfolio, seems extremely cheap. The company has spun-off its produce business and is a pure-play cannabis company now with a minority investment in the new merged ownership, which makes it simpler to understand than before, when produce accounted for about 50% of its revenue. The company provided pro forma results for Q1 and for 2023 and 2024 and updated its balance sheet too. Despite the huge surge in its price, it still trades at just 0.65X tangible book value, and it now has a bit more cash than debt. Looking at the projected adjusted EBITDA, its enterprise value trades at just 4.1X projected 2026 adjusted EBITDA (Koyfin suggests $31.3 million consensus for 2026).
Village Farms seems to be cheap, but the estimates are much higher than the current numbers. There are other LPs that also seem cheap, including Cronos Group, trading at 0.8X tangible book value, Organigram, now at 1.1X tangible book value and Tilray Brands at 0.7X. None trade at as low an enterprise value to projected adjusted EBITDA as Village Farms, but they do seem low. I do not include Cronos Group currently in my model portfolio, but it has a negative enterprise value (cash is bigger than the market cap of the debt-free company). Organigram trades at 8.4X enterprise value to projected adjusted 2026 adjusted EBITDA, and Tilray trades at just 5.6X.
While Village Farms is up a lot, Cronos Group has dropped 3% in 2025, Organigram is down 16%, and Tilray has dropped a stunning 69.5%. What I have discussed about Tilray in writing here and at Seeking Alpha is that it has dramatically approved its balance sheet. Many investors have missed this and are critical for the share-count rising. The company announced that shareholders approved a potential reverse-split this week, and many have been upset about this, though the stock has certainly lifted off of the all-time low set last week.
What Could Go Right for Canadian LPs
I have never suggested that this will happen, but investors need to understand that Canada, which has its own heavy taxation, could change the rules, which would lower taxes paid by the LPs dramatically. The tax is based on a fixed amount rather than a percentage of revenue, and the price has declined a lot, making the tax high on a percentage basis. There is no active move to change it, but the government in Canada has changed and it could be addressed.
There have been some issues for the world’s first legal market for a G-7 country of adult-use cannabis that remain, including some tight rules on edibles packaging, with very low overall THC limits. Again, there is no active process to change yet, but this would help the market greatly.
Another challenge has been inventory across the LPs. International exports have helped to address this. There have been a lot of bankruptcies too. It seems like the cannabis space in Canada has consolidated a lot, but there remain a significant number of license holders.
Buy All Canadian LPs?
While I am very overweight Canadian LPs in my model portfolio at 40% compared to their 29.5% weight in the index, which is the second-largest sub-sector there after ancillary companies, not all Canadian LPs make sense. I have written very recently again at Seeking Alpha on what is wrong with the Canopy Growth stock, which is down 40.7% in 2025 but on its way below $1 in my view from the current $1.57. In a nutshell, it is a money-losing company heavily in debt.
I cover closely 5 of the LPs, and like 3 enough at the current prices to include them in my model portfolio. I had been very critical of TLRY in the past, but it is my largest position, while Village Farms, which I did trim, is my smallest of the three. I avoid CGC passionately. I do pay attention to the other LPs and would add them to my coverage list if potential ownership by my subscribers was warranted.
Be Careful with the MSOs
In that piece three weeks ago, I concluded that too many investors focus exclusively on the MSOs. At the time, large cannabis ETF MSOS was down 32.8% year-to-date, and it has dropped further. Currently, MSOS is down 40.9%. That is not as much as TLRY, but it is terrible compared to the overall sector. On April 9th, I suggested here that investors should sell MSOS and buy Canadian LPs, and, since then, MSOS has rallied 7.7%. It is down 10.7% since I wrote that MSOS should be sold in late March.
The 280E challenge impacts all MSOs, but MSOS has a bigger problem in its massive exposure to its top 3 holdings that is 69.8%. Those stocks seem vulnerable to further erosion to me, especially if MSOS gets more redemptions. Here is the performance of MSOS and those three stocks in Q2:
MSOS is leading the way lower, and all are down, while the Global Cannabis Stock Index has rallied 6.4% so far in Q2. I am not trying to get convince anyone to sell the MSOs or MSOS today, but I remain cautious. 280E taxation remains in place and does not appear to be going away. I am especially cautious on these three largest positions in MSOS.
Conclusion
Again, one of the biggest mistakes that cannabis investors make in my view is that they invest their thinking and their money in only American cannabis companies who produce or sell cannabis. New Cannabis Ventures has long suggested that investors should focus more broadly, including ancillary companies and Canadian LPs.
I think that the stock market overall is a bit overdone to the upside after the huge sell-off in early April, but that may or may not matter to cannabis stocks, which are still down a lot in 2025 and since 2021. I wish that I could say confidently that Canadian LPs will rise, but I am not saying that. They could rise, but they should also fall less than the MSOs. Sure, if 280E goes away, the very beaten-up MSOs will do a lot better, but those who weigh risks against potential rewards need to understand that the federally legal Canadian LPs that trade on the higher exchanges have better balance sheets than the MSOs and seem pretty cheap. Good luck to all!
Sincerely,
Alan
