The marijuana industry is growing like a weed. Sure, the pun is eye-roll worthy, but it accurately describes the superior growth rates at the moment for legal cannabis.
According to leading cannabis research firm ArcView, North American legal-weed sales are expected to grow from just $6.9 billion in 2016 to an estimated $21.6 billion by 2021, representing a compound annual growth rate of 26%. This growth is expected to come from a combination of new legalizations, organic growth within already legal states and countries (Canada and Mexico have both legalized medical marijuana), and the movement of consumers from illegal to legal channels.
Image source: Getty Images.
Favorability toward pot has also shifted noticeably over the past two decades. Before California became the first state to legalize medical cannabis in 1996, just a quarter of those surveyed by Gallup in its periodic pot polls wanted to see the drug legalized nationally. As of 2016, this figure had jumped to an all-time record high of 60%. Presumably, the higher this percentage goes, the more pressure politicians in Washington will have placed on them to make scheduling changes at the federal level.
Jeff Sessions: the biggest threat to marijuana's expansion
But therein lies the problem for the marijuana industry: It's still a Schedule I substance at the federal level, meaning it has no medical benefits and is wholly illegal. Additionally, because of this strict scheduling, it's extremely difficult to gain approval to run clinical studies involving cannabis, most weed-based businesses are unable to take normal corporate income-tax deductions, and financial institutions typically won't lend to marijuana businesses. In short, the pot industry is placed at a major disadvantage, which is what makes marijuana stocks such a dangerous investment.
Because of this bifurcation -- the federal government standing pat on its scheduling, while individual states legalize -- it's always possible that the federal government shifts from its currently lax attitude toward cannabis and cracks down on the industry. President Trump has previously thrown his support behind medical cannabis "100 percent," but he's been less than amicable toward the recreational-weed side of the equation.
Donald Trump signing paperwork, flanked by Jeff Sessions and his wife. Image source: President Donald J. Trump's official Facebook page. Photo by Benjamin D. Applebaum.
Furthermore, Attorney General Jeff Sessions has been a primary opponent of marijuana's expansion. He's not minced his words when describing what should happen to the pot industry, and in May he sent a note to Congressional leaders requesting that they repeal the Rohrabacher-Farr Amendment. This is the amendment that gives weed businesses the right to lawfully operate in states that have passed cannabis laws. In effect, Sessions is asking Congress if he can trample states' rights.
Considering that only two groups of people currently oppose marijuana's expansion -- Republicans and senior citizens -- it's not inconceivable that Sessions places enough pressure on lawmakers to win concessions in the battle against the industry. Should this happen, it could be potentially devastating to dozens of publicly traded marijuana stocks, and the industry as a whole. Let's also not forget that back in February, now-former White House press secretary Sean Spicer intimated that a crackdown on the marijuana industry was coming.
The one marijuana stock that could still thrive with an anti-cannabis federal government
Undoubtedly, a reversal in the federal government's laxness on pot would be terrible news for marijuana stock investors, but not every last company would be decimated. One marijuana stock could still thrive, even with Sessions waving the metaphorical sword at the pot industry: Scotts Miracle-Gro (SMG 0.38%).
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In recent years, Scotts Miracle-Gro has been devoted more time and money to its subsidiary, Hawthorne Gardening Co. Hawthorne, which has grown both organically and through acquisitions, is primarily focused on hydroponics (growing plants in a nutrient-based water solution), as well as soil-based nutrients and lighting to be used by the medical marijuana industry. Though Scotts Miracle-Gro doesn't always break out Hawthorne's organic vs. total sales growth inclusive of acquisitions, Hawthorne itself has been growing steadily by a double-digit percentage in all recent quarterly reports.
Right now, Hawthorne Gardening Co. accounts for about 10% of Scotts' total sales, although this is the fastest growing segment for the company. If this operating segment were to be severely compromised by a federal crackdown, Scotts would once again lean on its core lawn and garden segment for corporate and residential consumers. This bread-and-butter segment traditionally grows in the low to mid-single digits, though it can be affected positive, or negatively, by abnormal weather patterns.
This is the unique advantage Scotts Miracle-Gro offers that practically no other marijuana stock does: a fall-back. If Hawthorne implodes, Scotts would probably only see a mid-single-digit reduction in sales, at worst, for a temporary period of time, and then rely on its core lawn and garden segment once more. If the federal government lets the industry be, Hawthorne should provide a consistent double-digit growth opportunity. That's an excellent risk-versus-reward for long-term investors.
