I watched a few minutes of Nik Wallenda walking a high-wire across an active volcano last week. There were a few dicey spots where the wind kicked up, but I really was never in doubt that he would make it all the way. And he did.
That's kind of the way I see the global cannabis industry. There have been some stiff headwinds. There have been some dicey spots. But I still think the cannabis market will grow to be much larger than it is right now.
Two of the top players in the cannabis market are Canopy Growth (NASDAQ:CGC) and Scotts Miracle-Gro (NYSE:SMG). Although their business models are quite different, both companies seem to have what it takes to go the distance. But which stock is the better pick for long-term investors?
The case for Canopy Growth
Canada boasts the largest market in the world where cannabis is legal nationwide. And Canopy Growth claims the biggest market share in that market.
Look for the Canadian market to grow significantly over the next few years. The Cannabis 2.0 market for cannabis derivatives products is just getting started. Ontario, Canada's most heavily populated province, is finally starting to issue more much-needed retail cannabis licenses. Canopy Growth should be among the biggest winners -- and probably the biggest winner -- from these developments.
But there's an even larger opportunity in international cannabis markets. Canopy Growth is already one of the leading suppliers of medical cannabis in Germany. It also has operations in other European nations, including Denmark and the United Kingdom, in Latin America, in southern Africa, and in Australia.
The most important cannabis opportunity of all, though, is in the U.S. Canopy Growth can't enter the U.S. marijuana market and keep its shares listed on major stock exchanges. However, the company is poised to immediately jump into the U.S. should federal marijuana laws change thanks to its option to acquire U.S.-based Acreage Holdings. It's also already marketing hemp-based CBD products in the U.S., which isn't a problem since hemp is legal at the federal level.
Canopy Growth's greatest competitive advantage is its relationship with Constellation Brands. The U.S. alcoholic beverage maker owns 37% of Canopy. The $4 billion-plus that Canopy received from Constellation puts the company in an enviable position in the cannabis industry.
What's the biggest knock against Canopy Growth? Its lack of profitability. However, the company is taking steps to curtail spending, including shutting down two greenhouses in British Columbia. With increased fiscal discipline and growing revenue, Canopy now appears to be on a path to profitability.
The case for Scotts Miracle-Gro
Scotts Miracle-Gro is best known for its consumer lawn and garden products. The company made roughly 45% of its total revenue from this business in its fiscal 2020 first quarter.
And Scotts' consumer lawn and garden products continue to deliver solid growth. The company's launches of new organic products have been very successful. Longer spring and summer seasons could boost sales even more in the future.
The real growth story for Scotts Miracle-Gro, though, is with its Hawthorne segment, which focuses on supplying gardening products to the cannabis industry. The segment's revenue jumped 41% year over year in Q1 to $198.8 million.
A significant portion of Hawthorne's growth has come as a result of acquisitions. However, the business has also benefited from a rebound in California's cannabis market as well as other expanding cannabis markets in Colorado, Michigan, Illinois, and Florida.
Scotts is poised to experience even more growth as more states legalize either medical or recreational marijuana and as existing cannabis markets mature. The company would also be a big winner if the U.S. legalizes marijuana at the federal level.
Unlike Canopy Growth, Scotts Miracle-Gro is already consistently profitable and has been for a long time. The company even pays a dividend with a yield of nearly 2%.
Canopy Growth could deliver the biggest gains over the long run. But I think that Scotts Miracle-Gro is the safer pick.
Marijuana stocks can be extremely volatile. Scotts' solid financial position and cushion from its consumer lawn and garden business make it less risky than most stocks with cannabis connections, in my view. Like Nik Wallenda in his tight-wire walk across a volcano, Scotts Miracle-Gro has a safety net.