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Better Buy: Aurora Cannabis vs. Scotts Miracle-Gro

By Keith Speights - Apr 19, 2020 at 2:34PM

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Which stock wins in a matchup between a beaten-down Canadian cannabis producer and a top U.S. supplier to the cannabis industry?

Aurora Cannabis (ACB 8.00%) and Scotts Miracle-Gro (SMG 2.35%) rank as two of the more prominent names in the North American cannabis industry. But there's a stark contrast between the two companies' businesses and their stock performances.

While Aurora's share price has plummeted nearly 70% so far this year, Scotts Miracle-Gro stock has jumped by a double-digit percentage. Of course, these moves have made Aurora Cannabis cheaper than it's been in a long time and have put Scotts near its all-time highs. 

Which of these marijuana stocks is the better pick now? Here's how Aurora and Scotts Miracle-Gro compare.

Cannabis growing in a greenhouse

Image source: Getty Images.

The case for Aurora Cannabis

It's easy to find reasons not to buy Aurora Cannabis stock. The company continues to lose a lot of money. Aurora has had turnover in its executive ranks and is still searching for a permanent CEO. It has laid off much of its staff. The company is even planning to do a reverse stock split just to keep its shares listed on the New York Stock Exchange.

But are there any reasons to actually consider buying Aurora? Maybe. 

Aurora Cannabis still claims a sizable market share in the Canadian adult-use recreational cannabis market. The company is also a leader in the country's medical cannabis market. Outside of Canada, Aurora continues to be a top supplier to the German medical cannabis market.

The company's investments in technology and automation have also reaped benefits. Aurora boasts one of the lowest production costs in the industry. It also has a production capacity that leads the industry, although the company isn't currently operating at maximum throughput.

Probably the best argument for Aurora is that the global cannabis industry should still expand significantly over the next few years. The company's scale of operations, cost structure, and existing market share combine to give Aurora a launching pad that few others can claim to go after this big opportunity.

There's also Aurora's valuation. The pot stock trades at less than four times sales. While the COVID-19 outbreak is weighing on sales now, once the crisis is over cannabis sales should regain momentum. Some investors could find Aurora's low price-to-sales ratio along with the likelihood of rising sales in the future appealing. 

The case for Scotts Miracle-Gro

While Aurora Cannabis faces several headwinds, Scotts Miracle-Gro appears to have the wind at its back right now. The company topped expectations with its first-quarter results in January. Both of Scotts' core businesses are growing nicely. And its stock is trouncing the market so far this year. 

Scotts Miracle-Gro's primary growth driver is its Hawthorne subsidiary. Helped by a string of acquisitions over the last few years, Hawthorne has become the top supplier of gardening products to the U.S. cannabis industry.

The opportunities for Hawthorne continue to expand. While the business already generates significant sales in California and Colorado, it's experiencing strong growth in newer markets including Florida, Michigan, and Illinois. With several states still in the early stages of their legal cannabis market launches and other states potentially on the way to legalizing either recreational or medical cannabis, Hawthorne should have plenty of room to run.

Don't overlook Scotts Miracle-Gro's consumer lawn and gardens business, though. The company is a longtime leader in the lawn and garden products market. Scotts' launches of new organics products have been quite successful. CEO Jim Hagedorn said in the company's Q1 conference call that the Performance Organics line is "one of the most important new products we've ever introduced." 

Although Scotts Miracle-Gro isn't consistently generating profits right now, its losses aren't too concerning. The company continues to offer an attractive dividend, which currently yields around 2%.

Better buy

My view is that it's an easy decision between Aurora Cannabis and Scotts Miracle-Gro. The clear winner is Scotts.

Although I did my best to present the arguments for considering Aurora, I think that the company faces too many problems to buy the stock right now. Scotts Miracle-Gro isn't risk-free. It has a sizable debt and, as mentioned already, isn't profitable. However, my take is that Scotts is in a much stronger position than Aurora is. 

Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Scotts Miracle-Gro. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
$83.51 (2.35%) $1.92
Aurora Cannabis Stock Quote
Aurora Cannabis
$1.89 (8.00%) $0.14

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