You can't lump all marijuana stocks into one category. There are pure-play stocks such as cannabis producers and ancillary providers that don't make or sell marijuana but are nonetheless important to the cannabis industry. Canopy Growth (CGC 1.95%) is a top example of the former category, while Scotts Miracle-Gro Company (SMG) is a leading example of the latter.
These two stocks have gone in opposite directions so far in 2019. Canopy is down big year to date, but Scotts shares have skyrocketed. Which stock is the better pick for the future? Here's how Canopy Growth and Scotts Miracle-Gro compare.
Image source: Getty Images.
The case for Canopy Growth
I could list several reasons why you shouldn't buy Canopy Growth. The company continues to lose money like it's going out of style. Its management has bungled things badly by shipping way too many cannabis oil and softgel products earlier this year. But I can also identify quite a few reasons why Canopy Growth is a stock to seriously consider.
At the top of the list is the sheer potential for the global cannabis industry. We could realistically be looking at a $75 billion market by the end of the next decade, and that's a relatively conservative estimate. A company would only have to capture a small market share to be a huge winner.
But Canopy Growth arguably is in a very good position to capture a significant chunk of the global cannabis market. It's a leader in the Canadian adult-use recreational marijuana market and one of the top players in the European medical cannabis market.
Perhaps the strongest argument for Canopy, though, is that it has a big partner to help it win in the global market and has lots of cash in its coffers, thanks to that partnership. I'm referring, of course, to Constellation Brands, the beverage alcohol giant that owns 37% of Canopy Growth. The $4 billion-plus in cash that Canopy received from Constellation is a game changer.
Canopy was the first Canadian cannabis producer to jump into the U.S. hemp market. It was also the first to strike a deal that allows it to quickly move into the U.S. marijuana market if laws are revised to make cannabis legal at the federal level.
After taking a shellacking throughout much of 2019, Canopy Growth's market cap now stands below $6.5 billion. That seems like a steep valuation based on the company's revenue so far. But Canopy's revenue should grow significantly as the retail environment in Canada improves, the cannabis derivatives market kicks into full swing, and medical cannabis markets around the world expand.
The case for Scotts Miracle-Gro
We could find reasons to dislike Scotts Miracle-Gro, too. The company's debt of around $1.65 billion isn't something investors would like to see for a company that made a little over $3 billion over the last 12 months. Scotts' valuation isn't exactly cheap with a price-to-earnings-to-growth (PEG) ratio of 2.1. However, there's also a lot to like about the stock.
For one thing, Scotts is consistently profitable. And those profits are growing, with the company reporting a year-over-year earnings increase of 143% in its fiscal 2019 fourth quarter.
A key reason for that growth is Scott's Hawthorne subsidiary that's a top supplier of hydroponics products to the cannabis industry. In the fourth quarter, Hawthorne generated 15% of Scott's total revenue and over 58% of its year-over-year revenue growth.
I expect Hawthorne to become a much bigger contributor in the near future. It continues to see strong sales growth in established legal marijuana markets like California and Colorado. The unit also delivered great growth in big medical cannabis markets such as Michigan. Big opportunities are about to open up, as well, with Illinois and Michigan launching legal recreational marijuana markets in 2020.
Scotts' core consumer lawn and garden business is also performing nicely. The company's new Performance Organics line of products has been a big winner so far. Its Triple Action three-in-one ant killer, weed killer, and fertilizer products are delivering tremendous sales. A relaunch of the Ortho GroundClear vegetation killer has also been a major success.
In addition to its solid growth prospects, Scotts Miracle-Gro offers an attractive dividend that currently yields over 2.3%. The company has increased its dividend by nearly 29% over the last five years.
Better buy
If you're a really aggressive investor with a high tolerance for risk, Canopy Growth might be more up your alley. There will almost certainly be a lot of volatility with the stock, but I think that it should be a big winner over the long run as the global cannabis market expands.
However, my hunch is that most investors would be better off with Scotts Miracle-Gro. The company's Hawthorne business gives it a ticket to ride the growth in the cannabis industry but its lawn and garden business should provide steady revenue and decent growth of its own. Throw in Scotts' dividend, and this stock is the kind of marijuana stock that even relatively conservative investors might like.
