The cannabis sector is projected to be one of the fastest-growing sectors over the long term. So, it's natural that many investors would like some exposure to this budding space. It can be challenging, however, to decide which stock or stocks to invest in.
Our quest here is to explore which of two ancillary cannabis stocks -- consumer lawn- and garden-care specialist Scotts Miracle-Gro (SMG -0.09%) or cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.06%) -- currently looks like the better long-term investment.
Image source: Getty Images.
Business snapshots
Scotts Miracle-Gro is a 151-year-old, Ohio-based company that makes consumer lawn and garden care products that are household names. Two of its main brands form the company's name -- Scotts and Miracle-Gro -- with Ortho being its third major brand. The company entered the cannabis space via its formation of its Hawthorne Garden Supply subsidiary in 2014. The unit, which has grown through acquisitions, provides supplies to cannabis growers who used hydroponic growing methods. (Hydroponics is a method of growing plants in a water-based, nutrient-rich solution. It doesn't use soil.)
Innovative Industrial Properties buys properties in U.S. states where medical marijuana is legal and leases them to state-licensed operators using long-term, triple-net (tenants pay all major variable costs) leases. It currently owns 30 properties -- which tenants use to grow and/or process medical marijuana -- located in 12 states, which are fully leased. The San Diego-based company's organization as a real estate investment trust (REIT) means that it must pay out at least 90% of its income to shareholders as dividends.
Key data
| Metric | Scotts Miracle-Gro | Innovative Industrial Properties |
|---|---|---|
|
Cannabis pure play? |
No |
Yes |
|
Market capitalization |
$5.6 billion |
$1.0 billion |
|
Dividend yield |
2.3% |
3.3% |
|
Forward price to earnings (P/E) |
20.2 | 30.1 |
|
Projected average annual earnings per share (EPS) growth over the next 5 years* |
11.1% | N/A; 74.3% growth projected for next year |
|
Year-to-date 2019 stock return** |
67.7% | 99.8% |
|
3-year stock return** |
33.4% | 402*** |
Data sources: Y!Finance and YCharts. Data as of Sept. 24, 2019. *Wall Street's consensus estimates. The S&P 500 has returned 20.1% so far in 2019 and 45.6% over the 3-year period. ***IIP has only traded since December 2016, so a couple of months shy of three years.
The better stock bet for the long term?
Both of these stocks have their good points, though Innovative Industrial Properties currently looks like the better choice for most long-term investors, assuming they're comfortable with at least a moderate amount of risk and volatility.
For one reason, Innovative Industrial is a pure play on cannabis, so should have greater growth potential. Indeed, Scotts' cannabis business -- which accounted for 15% of its sales in its most recent quarter -- has been the company's growth engine for much of the last few years. Moreover, Scotts' cannabis market is limited to growers who use hydroponic growing methods, while Innovative Industrial's market has no such limit.
Secondly, Scotts stock is pricier than Innovative Industrial's when we take future growth expectations into account. Scotts stock is priced at 20.2 times projected forward earnings, while Innovative Industrial stock is priced about 50% higher, but Innovative Industrial's earnings growth is expected to be considerably more than 50% higher than Scott's both this year and next.
Lastly, but importantly for income-oriented investors, Innovative Industrial stock's dividend yield is higher at 3.3%, while shares of Scotts are at 2.3%.
