Scotts Miracle-Gro could have the best marijuana strategy

Legal marijuana is expected to be a fast-growing market, with some predicting a market opportunity of up to $ 166 billion. In many years, the industry is still in its infancy. But the projection shows how much Wall Street is excited about the legal weed.

The problem is that investors have the bad habit of being too enthusiastic at first, pushing stocks of stocks to unrealistic highs. The recent decline in marijuana growers suggests that this has occurred again. here's why Scotts Miracle-Gro (NYSE: SMG) has not been touched, and why this may be a better option for long-term investors interested in space.

Picks and shovels

When you buy a marijuana grower like Cover growthyou make a direct bet on the future of the legal pot. It's a notable player in the field, but its future will not be as bright as expected if legalization does not continue to spread across the United States. Its future is essentially linked to more people taking advantage of the legal opportunity to use marijuana. This is not bad or different from other pot stocks; it's a problem they all face when competing for a share of the market.

This last point is important: many companies are looking to acquire a share of the marijuana market. Of course, Canopy is an important player, but it's not the only player … That's where Scotts Miracle-Gro comes in. This company has long been serving the slow and steady market of maintenance lawns, helping people to grow and stay on their feet and flowers. A few years ago, management decided that she also wanted a share of the marijuana market.

However, instead of growing the plant, she kept knitting and made her way into the hydroponic production space. Facilities in which marijuana is grown typically use hydroponic systems. At this point, Scotts is a leading player in the hydroponics niche, with sales of $ 176 million in its hydroponics division Hawthorne in its final quarter. This is an annual turnover rate of about $ 700 million. This is a large, growing business, with management estimating that organic sales increased by almost 20% over the first nine months of fiscal 2019 (recent acquisitions have further increased Hawthorne's overall sales ).

A winner anyway

What's exciting is that no matter who wins the Marijuana market share war; Scotts can provide them with all the tools and supplies they need. As jar manufacturers come and go, they will always benefit from the growing demand from the end market, which is an interesting statistic.

It seems that legal marijuana has not been as important as many others. According to the industry observer, BDS Analytics, in 2018, 90% of marijuana sales in Massachusetts were illicit. In California, this figure was close to 80%. In Oregon and Washington, it is estimated that illegal pot sales account for about 50% of the total. Although many thought that legal marijuana would push illegal marijuana out of the market, that just does not seem to happen – at least not quickly.

SMG Data by YCharts

The big problem is the most likely cost. Without having to deal with taxes and regulations, illegal marijuana is cheaper. This sounds like the idea of ​​buying cigarettes in areas where taxes are low and selling in areas where taxes are higher. This is not legal, but tax evasion results in lower selling prices and / or higher profits for the cigarette seller. Given that illegal marijuana growers were already breaking the law before the pot was legalized, continuing to meet the demand for grass at low cost should not be surprising. But this could be a source of trouble for companies hoping to see huge growth in the legal marijuana market.

Scotts Miracle-Gro, on the other hand, benefits in both directions. Of course, he would prefer to sell to people who operate in the best conditions. But everyone can buy hydroponic products from society, which means that Scotts not only wins as marijuana production increases (no matter which companies end up being the biggest players), but can also benefit Illegal marijuana growers struggling to stay.

Worth the detour

Scotts Miracle-Gro does not offer the growth potential of the profits of a pure-play pot stock, because the slow and steady maintenance of lawns still accounts for about 75% of its sales figure. 39; business. But if the marijuana market continues to grow as predicted by Wall Street, Scotts offers a way to play in this space without the need to own a producer. After all, the producer you choose may or may not win in a very competitive market in which some producers are still playing outside the legal framework. Add to the fact that Scotts has begun to reduce its influence on the development of its hydroponic business, and that the company probably deserves a thorough dive if you are interested in the marijuana space. Income investors, on the other hand, will likely appreciate the company's 2.1% return.