Finding a cannabis stock that hasn't suffered significant losses this year is a challenging task. Since the summer, the marijuana industry has undergone a lot of turmoil, and it all seems to have started with an illegal growing operation involving CannTrust that put investors on edge. The firing of Canopy Growth's CEO Bruce Linton sent more shockwaves throughout the industry. Deaths and illnesses stemming from vaping put additional downward pressure on pot stock prices.
But one cannabis company has been able to continue producing strong returns this year despite the bearishness in the sector.
Up 63% in 2019
Year to date, Scotts Miracle-Gro (SMG 0.66%) is one of the top performers in the industry, as it has been immune to the many controversies facing cannabis. The main reason is that Scotts isn't a cannabis producer. It provides the tools to help companies with gardening and the cultivation process through its subsidiary, the Hawthorne Gardening Company, but it isn't in the cultivation business itself. That's an important distinction because it means Scotts isn't vulnerable to low pot prices, the black market beating the legal industry, or any other headwinds pure-play marijuana stocks are facing today.
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As long as marijuana companies continue operating and new ones are setting up their operations, Scotts will continue to have customers to serve. And it's evident from its financial results that there has been a lot of growth this past year. In the company's year-end financials, released on Nov. 6, the Hawthorne business continued to do well, even exceeding expectations.
For the full fiscal year, the Hawthorne segment generated sales of $671 million, which was nearly double the $345 million that it reported in fiscal 2018. By comparison, Scotts' U.S. consumer segment, which makes up more than two-thirds of the company's total revenue, saw sales growth of just 8%. Hawthorne's share of the top line has grown from 13% one year ago to now making up more than 21% of sales.
Even more growth potential ahead
What's exciting for Scotts is that the opportunity for the company will only increase as more states legalize marijuana and more growers start cultivating. Michigan is the most recent state to open its doors to the industry as of Dec. 1, and it's been strong out of the gate -- sales totaled $1.6 million in the first eight days of operations. That's also with the industry not operating at full capacity, with just 10 retail licenses approved in the state and only five up and running during those first eight days.
Hawthorne has seen strong growth in new states as well as in Michigan, where growers have been getting things ready. Scotts' CEO Jim Hagedorn stated in the company's earnings release that "During the quarter, we reported strong growth -- often above 50 percent -- in established West Coast markets, especially California, as well as emerging markets like Michigan, Florida and Massachusetts. We also saw consistent growth in lighting, nutrients and other major product categories."
Despite the opportunities, the company is exercising caution in its outlook for fiscal 2020, projecting Hawthorne's sales to grow between 12% and 15% for the full year. That's down from what the company refers to as "apples-to-apples" sales growth of 24% that Hawthorne reported in fiscal 2019, which is indicative of the organic growth it has generated during the past year. Scotts expects that its top line, across all segments, will grow between 4% and 6% in fiscal 2020.
Is Scotts a buy today?
For investors who are looking for a safe way to invest in the marijuana industry, Scotts is one of the better options. Not only does it have minimal risk, but it is profitable and trades at very reasonable multiples -- 12 times earnings and 1.8 times sales. Its guidance for the next fiscal year might be a bit soft, but that can quickly change as marijuana legalization continues to progress. On top of all the growth potential, the stock also provides investors with a dividend yield of 2.2%.
Scotts is a great option for investors who want to benefit from the cannabis industry's growth without taking on the risk that's typical with many marijuana stocks.
