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Better Buy: Cara Therapeutics vs. Scotts Miracle-Gro Company

By David Jagielski - Feb 19, 2020 at 8:30AM

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These stocks went in opposite directions in 2019. Will that trend continue this year?

Two of the hottest places you can invest today are in biotech and cannabis. Cara Therapeutics (CARA 2.96%) will give you exposure to the former, while Scotts Miracle-Gro (SMG 4.39%) is a good option for investors looking to bank on the growth of the latter.

Investors in both stocks have reason to be excited about each company's future, but deciding which stock is the better option for you may come down to not just your outlook for the companies, but the risk you're willing to take on.

Is Cara Therapeutics' risk worth the reward?

Investors got a glimpse of just how volatile shares of Cara can be when the stock crashed in December, losing 35% of its value in just one day. It wasn't a bad earnings result that sent investors into a panic but underwhelming results from its phase 2 clinical study of Oral Korsuva. This highlights just how important the drug, which treats itching associated with chronic kidney disease, is to Cara's future. The good news is that Korsuva Injection is further along in phase 3 trials, and in November, it showed encouraging results.

The problem for investors is that those results, while positive, are still not a guarantee that the Food and Drug Administration (FDA) will approve the drug. However, it may be a low risk given the progress it's making and that the FDA awarded Korusva a breakthrough therapy designation. Either way, investors will need to be patient as getting drugs approved and progressing through clinical studies can take a long time, with studies often taking years to complete.

Pills spilling out of a fallen-over pill bottle

Image source: Getty Images.

Cara needs Korsua to succeed because over the past 12 months, the company generated just $20.9 million in sales with a loss of $98.4 million. The company has also burned through more than $102 million in free cash during that time. Everything hinges on Korsuva paying off.

Can Scotts continue its impressive run?

Scotts' future doesn't depend on anything but for the cannabis industry to continue growing, literally. Its Hawthorne subsidiary helps cannabis producers through hydroponics, which is the process of growing plants without the need for soil. That's why it's no surprise that the stock is trading near its 52-week high given the rising popularity of cannabis. The company is coming off of a strong first-quarter report released on Jan. 29, which showed Hawthorne's sales grew by 41% from the prior-year quarter. The segment is what's keeping Scotts' numbers up as its U.S. consumer business saw much more modest revenue growth of 8%.

The one concern for investors is that the company is only expecting its total sales growth for fiscal 2020 to come in between 4% and 6%, which is a modest figure given the 23% growth it generated to start the year. But with strong results to compare against from fiscal 2019, Scotts won't have as easy of a time in smashing prior-year numbers. The worst case for investors is that the company continues to generate modest, single-digit growth, while the best case could see it go into the double-digits if the marijuana industry continues booming.

Which stock is the better buy today?

Whether you are inclined to buy Cara or Scotts will likely depend on your outlook for the cannabis industry in the U.S. If you're optimistic about its future, then Scotts is the easy choice; it's less of a risk with its gardening business giving it a strong base, while Hawthorne can accelerate its growth as more producers buy its products. If you're not bullish on pot, then Cara may be the better option; Korsuva is making lots of progress, and with the drug at phase 3, it's fairly far along in the process.

For agnostic investors who may not have a strong opinion on either industry, Scotts will be the better buy if for no other reason than it's less volatile than Cara. It's also less dependent on cannabis than Cara is on Korsuva. if the cannabis industry doesn't do as well as investors may expect it to do, Scotts still looks good with its U.S. consumer segment being able to generate growth. And at a price-to-earnings multiple of less than 15, investors aren't paying a whole lot to own it, either. Cara, meanwhile, still has a long way to go just to hit breakeven.

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Stocks Mentioned

The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
SMG
$82.27 (4.39%) $3.46
Cara Therapeutics, Inc. Stock Quote
Cara Therapeutics, Inc.
CARA
$9.39 (2.96%) $0.27

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