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3 Safe Cannabis Stocks to Hold During the COVID-19 Pandemic

By David Jagielski - Updated May 13, 2020 at 8:19AM

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There are some attractive options for growth investors, even amid the rout in the broader cannabis sector.

Cannabis investors often take on a great deal of risk by investing in the industry, and they've incurred some significant losses over the past year. The Horizons Marijuana Life Sciences ETF, which holds some of the top pot stocks in North America, is down 70% in the past 12 months. Those types of returns can scare away prospective investors from considering the industry.

But there are safer ways to get exposure to the potential growth in the cannabis sector where investors don't have to take on significant risks. Below are three relatively safe stocks that are performing well in 2020 and investors should consider buying today.

1. Scotts Miracle-Gro

Scotts Miracle-Gro (SMG -0.81%) is known for its lawn and garden products, but what makes the stock an exciting buy is its exposure to the cannabis industry -- without actually being a pot producer itself. Its Hawthorne Gardening business distributes hydroponic products that allow plants to grow without soil. This segment has been driving a lot of the company's growth. Scotts released its second-quarter results on May 6, and Hawthorne's sales were up 60% year over year. Its U.S. consumer business, which focuses on the company's traditional lawn and gardening products, was up a more modest 11%.

Cannabis plant.

Image source: Getty Images.

As people stay indoors during COVID-19, Scotts can provide help with tools to stay occupied. And the company's seeing a growing demand for gardening. The company's CEO, Jim Hagedorn, said that "for the week ending May 3, we recorded our strongest seven-day period in company history with consumer purchases of more than $190 million at our largest four retail partners." The company's gardening business is doing better than it has in the past. In 2019, its sales were up by just 8%.

Currently, the stock trades at 26 times earnings, which is a good price given the growth that it's been generating.

2. GW Pharmaceuticals

GW Pharmaceuticals' (GWPH) claim to fame is having the first and only cannabis-based drug approved by the U.S. Food and Drug Administration (FDA). Epidiolex is used to treat people with Dravet syndrome or Lennox-Gastaut syndrome, as young as two years old.

What makes the stock a safer buy than many other pot stocks is that medical marijuana is more widely accepted around the world, and that makes growth for GW a whole lot easier to achieve than if it needed to wait for the recreational markets to open up. Outside of Uruguay and Canada, as well as 11 states in the U.S., there aren't any other (legal) markets for recreational pot.

In 2019, during Epidiolex's first full year on the market, GW generated sales of $311.3 million. A year earlier, the company's top line totaled just $12.7 million. Its net loss has also come down drastically -- from $295.2 million in 2018 to a more modest net loss of just over $9 million this past year. There could still be a lot more growth to come for GW because in September, the European Commission approved Epidiolex to be used to in Europe to treat Lennox-Gastaut syndrome and Dravet syndrome.

3. Shopify

Shopify (SHOP -2.82%) is a tech stock that allows merchants to easily sell products and services online through many different channels. As more people lose their jobs, Shopify is catering to the needs of customers who are looking for ways to generate extra income. And that can translate into additional growth for Shopify this year. The company stated in its earnings release, dated May 6: "New stores created on the Shopify platform grew 62% between March 13, 2020 and April 24, 2020 compared to the prior six weeks, driven by the shift of commerce to online as well as by the extension of the free trial period on standard plans from 14 days to 90 days."

In Q2, Shopify's sales were up 47% year over year, but the company's net loss also grew by 30%. Profitability's remained elusive for Shopify as it's recorded a loss every year since its inception. However, the company's revenue growth has been more than enough to get investors excited about the stock. And the good news is that there are still many great opportunities for Shopify to keep growing.

One early-stage opportunity is cannabis. In addition to government-run cannabis stores, including the Ontario Cannabis Store and BC Cannabis Stores, industry giants Aurora Cannabis (ACB 2.21%) and Canopy Growth (CGC -2.21%) use Shopify's platform to sell pot online. In September 2019, Shopify announced that it would make its cannabis e-commerce platform available to merchants in the U.S. that sell hemp products, including hemp-derived cannabidiol (CBD). Shopify doesn't specify how many cannabis transactions it's processed on its platform, but the industry could play a much larger part in its operations in the future, especially if the U.S. federal government legalizes pot. Cannabis research company BDS Analytics projects that by 2025, the legal pot market in the U.S. will be worth $29.7 billion, up from an estimated $13.6 billion in 2019.

Which stock is the best one to buy today?

All three stocks are up this year and ahead of the S&P 500, although Shopify's got a big lead thus far:

Stock chart comparing 4 equities

Image Source: YCharts

For growth investors, Shopify may be the most attractive option today. But given its lack of profitability and the stock consistently trading at more than 25 times its sales and 15 times book value, it's a bit of a steep price to pay for a company that may run into some challenges if COVID-19 sinks global economies into prolonged recessions.

Both GW and Scotts give investors more exposure to cannabis and still have a lot of growth left as well. But with a solid gardening business already in place that the company can build around, Scotts is the safer investment today.

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Stocks Mentioned

The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
$81.27 (-0.81%) $0.66
GW Pharmaceuticals plc Stock Quote
GW Pharmaceuticals plc
Shopify Inc. Stock Quote
Shopify Inc.
$33.04 (-2.82%) $0.96
Canopy Growth Stock Quote
Canopy Growth
$2.65 (-2.21%) $0.06
Aurora Cannabis Stock Quote
Aurora Cannabis
$1.39 (2.21%) $0.03
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$2.81 (3.29%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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