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Better Buy: Canopy Growth vs. Scotts Miracle-Gro

By Keith Speights – Jun 16, 2019 at 2:00PM

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Which stock wins in a battle between the biggest cannabis producer by market cap and the biggest supplier to the cannabis industry?

If you're considering buying either Canopy Growth (CGC) or Scotts Miracle-Gro (SMG -3.96%), you probably wish you could turn back the hands of time. Both stocks are up more than 50% so far in 2019. The nice gain is a welcome change for Scotts, but just a continuation of momentum for Canopy Growth, which has skyrocketed around 1,950% over the last three years.

It's not too late to jump aboard either of these stocks. But which one is the better pick for long-term investors now? Here's how Canopy Growth and Scotts stack up against each other.

Cannabis leaf on top of U.S. cash

Image source: Getty Images.

The case for Canopy Growth

This is a great stock to buy if you believe two things. First, that the global cannabis market will grow significantly over the long term. Second, that Canopy Growth will be a leader in the market. There are good reasons for thinking that both these assumptions will prove correct.

Over 40 countries now allow the legal use of cannabis in some form. The cannabis markets in most of these countries are only in their early stages, which means there's plenty of room for growth.

Just how big could the global cannabis market be? Over the next 10 to 15 years, it's possible that the market could top $100 billion, with some observers thinking it could even exceed $200 billion. Over the shorter term, Arcview Market Research and BDS Analytics project a global cannabis market of around $32 billion. Regardless of which estimate you use, it seems likely that the cannabis market will indeed grow significantly.

Canopy Growth currently leads in market share in the Canadian recreational marijuana market. And it's one of the top players in international medical cannabis markets. The company is entering the U.S. hemp cannabidiol (CBD) market by building a large-scale hemp production facility in New York State. And its deal to buy U.S.-based cannabis company Acreage Holdings (ACRGF) as soon as federal marijuana laws change in the U.S. puts it in position to jump into the world's largest marijuana market.

All these factors lend credibility to the argument that Canopy Growth is likely to remain a leader in the global cannabis market as it experiences tremendous growth. There's another reason to think that will be the case: its relationship with alcoholic beverage maker Constellation Brands (STZ -0.19%).

In 2018, Constellation invested $4 billion in Canopy Growth, giving it a 38% stake in the company and warrants to gain a majority interest. In exchange, Canopy Growth received a huge cash stockpile that it has put to use in expanding operations across the world. This cash is a big advantage for the company, as is its partnership with Constellation, which has considerable expertise in developing successful commercial brands.

The case for Scotts Miracle-Gro

You can apply similar arguments for buying Scotts Miracle-Gro. If the cannabis market expands significantly, Scotts should be a big winner since its Hawthorne Gardening subsidiary is the largest supplier of hydroponics and related solutions to the cannabis industry.

But there are a couple of twists that make it even more attractive. One is that the company can operate legally in the U.S. cannabis market now. Scotts doesn't directly deal with cannabis products, so it doesn't violate any federal laws. 

This is important considering that the U.S. is likely to generate more than two-thirds of legal cannabis sales for years to come. The U.S. is also a high-growth market. More states are legalizing adult-use recreational marijuana, with Illinois becoming the latest to do so and potentially more states on the way. Many of these markets have significant room to grow, including the biggest of them all, California.

Sure, Scotts has competition in supplying the cannabis industry. But CEO Jim Hagedorn noted in the company's Q2 conference call in May that "the No. 3 player in this space has exited the category in recent months, and we have further distanced ourselves from the No. 2 player." 

Another twist that makes the stock attractive is the company's core consumer lawn and garden business, which contributes more than 80% of total revenue.  

Although this segment isn't likely to deliver awe-inspiring growth, it provides reliable cash flow. And that steady cash flow enables the company to pay a solid dividend that currently yields nearly 2.5%.

Better buy

Which of these stocks is the better buy? It depends on what kind of investor you are.

For someone less aggressive who would like to still profit from the cannabis boom, Scotts Miracle-Gro looks like a pretty good pick. The company's Hawthorne subsidiary should especially benefit from growth in the U.S. cannabis market, while its consumer lawn and garden business provides some stability if the cannabis market takes longer to mature than expected.

Aggressive investors, though, will probably prefer Canopy Growth. Although the stock already reflects expectations of tremendous growth, I think that it will be able to meet those expectations and more over the long run. My view is that the relationship with Constellation Brands makes it deserve the "most likely to succeed" award among Canadian cannabis producers.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

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