Picks and shovels versus pure play. U.S. versus Canada. Large cap versus small cap. Scotts Miracle-Gro (NYSE:SMG) and Supreme Cannabis (OTC:SPRWF) present a dramatically different choice for investors on all of these fronts.
These two stocks also provide a stark difference in performance so far this year. Scotts stock is up well over 60%, while Supreme Cannabis' shares are down by a double-digit percentage. But which of these marijuana stocks is the better alternative for long-term investors now? Here's how Scotts Miracle-Gro and Supreme Cannabis compare.
The case for Scotts Miracle-Gro
After a rough year in 2018, everything appears to be going splendidly for Scotts Miracle-Gro in 2019. The company's Hawthorne subsidiary, which ranks as a top leader in supplying hydroponics products to the cannabis industry, has been a big factor behind its success.
Scotts Miracle-Gro blew away revenue and earnings estimates for the third quarter thanks largely to the contribution from Hawthorne. The cannabis-focused business posted year-over-year sales growth of 138%. Although Hawthorne's acquisition of Sunlight Supply last year made a big difference, the subsidiary still generated impressive organic sales growth of 49%.
The underlying reasons behind Hawthorne's tremendous growth make Scotts an attractive stock for long-term investors. Hawthorne's biggest market, California, continues to gain momentum after a stumbling start to its recreational marijuana market last year. Emerging markets in other key states, particularly Florida, Massachusetts, Michigan, and Ohio, are also driving significant growth for Hawthorne.
While Scotts is well positioned to profit as its current markets expand over the next few years, the company could also have an even bigger market opportunity in the future. Nine states could potentially vote to legalize marijuana in some form in 2020. Five of them could vote on the legalization of recreational pot, including big states like Florida and New Jersey.
Don't overlook Scotts Miracle-Gro's core business of selling consumer lawn and garden products, though. This business is also performing well so far in 2019. The launches of new organic product lines have helped fuel higher growth. With the potential for climate change to result in longer growing seasons for lawns and gardens in the future, Scotts could enjoy sustained momentum over the long run with its core business.
Scotts also offers an added bonus for income investors. The company's dividend yield currently stands at nearly 2.3%. Scotts has steadily increased its dividend payout in recent years.
The case for Supreme Cannabis
Analysts don't think investors should count out Supreme Cannabis just because things haven't gone so well for the stock so far this year. In fact, they project that Supreme Cannabis' shares could more than double.
The Canadian cannabis producer's revenue growth is more impressive than that of Scotts Miracle-Gro. Supreme Cannabis reported that its Q3 revenue skyrocketed 90% -- not from the prior-year period but from the previous sequential quarter. It also achieved positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first time ever.
Most of Supreme Cannabis' rivals have focused primarily on cranking up production capacity. Although Supreme Cannabis has expanded its capacity as well, it's done so while staying true to its prioritization of high-quality premium cannabis products.
The primary growth opportunity for Supreme Cannabis continues to be the Canadian adult-use recreational marijuana market. As the company transitions from wholesale distribution of its products to building up its 7ACRES brand, it should be able to drive revenue significantly higher.
Supreme Cannabis could also receive a big boost from the launch of the "Cannabis 2.0" derivative products market in Canada. The company is one of only four licensees to market Pax Labs' popular Pax Era vaporizer in Canada.
Although Supreme Cannabis hasn't done much in the past outside of Canada, that's changing. The company recently launched Supreme Heights, a U.K.-based business that will invest in what it calls "high-growth potential, early stage CBD brands across a variety of product forms in the health and wellness space" in Europe. The European CBD market is projected to more than quintuple in size over the next five years, giving Supreme Cannabis another major growth opportunity.
Better marijuana stock
Investing in marijuana stocks is inherently risky, but some stocks are riskier than others. My view is that Scotts Miracle-Gro isn't nearly as risky as Supreme Cannabis.
Scotts enjoys a significant competitive advantage due to its scale of operations. It sells its products in multiple countries, but, most importantly, is a leader in the biggest cannabis market of all: the U.S. In addition to its high-growth Hawthorne subsidiary, Scotts' core consumer lawn and garden business generates solid cash flow that should keep the nice dividends flowing.
Supreme Cannabis could deliver big gains, but I think the better risk-reward profile belongs to Scotts Miracle-Gro.