Cannabis investors have suffered some serious losses this year, and there's little hope of that changing anytime soon. That's why investing in stocks in other industries that also have exposure to the upside of the cannabis sector is the best option for marijuana investors today. Two stocks that fit these criteria are tobacco giant Altria Group (MO 0.69%) and gardening company Scotts Miracle-Gro (SMG 1.83%).
These two companies offer investors significant growth opportunities now that they've both become involved in cannabis in different ways. Let's take a look at which of these two stocks investors should consider buying today.
Is Altria's exposure to vaping too big of a risk for investors?
Altria hasn't generated much growth in recent years, with sales climbing from $18.9 billion in 2015 to $19.6 billion in 2018, increasing just 4% in three years. That's why the company needs its investments in e-cigarette maker JUUL Labs and cannabis company Cronos Group (CRON +0.00%) to inject more sales into its financials. Altria's profits totaled $1.8 billion over the past 12 months and the company has the capacity to absorb a short-term hit for the sake of future growth over the long-run.
The challenge for Altria is that much of its potential growth is tied to vaping, which is a big question mark as health concerns weighed down vape sales in the cannabis industry. Data from Dec. 10 indicates vaping-related health problems are still a serious issue, with the death toll rising to 54 and more than 2,400 people suffering from lung-related illness from vaping. The Centers for Disease Control and Prevention (CDC) says the number of cases is starting to slow but new hospitalizations continue to occur. The CDC identified vitamin E acetate as the likely culprit behind the illnesses, and regulators found the substance in many black-market products.
Image Source: Getty Images.
Although health officials made progress in identifying the problem, until they've fully resolved the issue and consumers' minds are at ease, it could significantly affect Altria's investments in JUUL as well as Cronos, which is looking to being a big player in the vape market. Some analysts believe Cronos has the potential to "be a leader in the vape pen category."
The bigger problem for Altria is that regulators could take JUUL's products off the market entirely, as the U.S. Food and Drug Administration reviews the safety of e-cigarettes. Altria already wrote down its investment in JUUL by $4.5 billion when it reported its Q3 results in October.
Does Scotts Miracle-Gro have enough growth potential?
Scotts doesn't face the same risks Altria does, but the question for investors is whether the company offers enough growth. Its subsidiary Hawthorne Gardening provides equipment used by cannabis growers, including lighting and nutrients. This business has boosted Scotts' numbers, with the company posting sales of $3.2 billion in fiscal 2019, which grew 18.5% from the $2.7 billion Scotts generated the prior year. That's a big improvement from fiscal 2018 when sales were flat from fiscal 2017.
The cannabis industry's rapid growth and Hawthorne's role in it gives Scotts a new avenue to grow its sales. However, even with Hawthorne's sales nearly doubling (95%) from the prior year, the company is not expecting those high growth levels to continue. Scotts projects that for fiscal 2020, Hawthorne's sales will climb by no more than 15%. The company did not offer specific reasons for the decline in guidance, saying "the basic fundamentals remain the same."
With the cannabis industry already crowded with producers, new entrants are hesitant to enter the market and given how badly marijuana stocks performed this past year, Scotts could be anticipating fewer growers in need of supplies next year.
Why Scotts is the better buy today
Altria could see more growth than Scotts if the vaping concerns subside, but that's not a reasonable expectation today given that people are still falling ill and dying from using vapes. Altria's forward price-to-earnings (P/E) ratio of 11 indicates there could be good value in the stock for investors who buy its stock today, but it's still not enough to justify investing in the company given the risk involved. There hasn't been much excitement surrounding the stock, as its year-to-date returns of 4% pale in comparison to the S&P 500, which is up 27%, and Scotts' share price, which has soared 65%.
Scotts' forward P/E is 19, which is a bit higher than Altria, but given the growth still expected from Hawthorne and Scotts being a less risky investment overall, the premium is easy to justify. Although Altria offers a higher dividend yield of 6.6%, well above Scotts' payout of 2.2% and the S&P 500 average of 1.85%, it's not enough to make it a better buy, even if you're a dividend investor.
Long term, Scotts is the safer overall pick, and although its growth forecast may be a bit soft for fiscal 2020, that could change if more states legalize marijuana use.
