For more than two months, the coronavirus disease 2019 (COVID-19) pandemic has wreaked havoc on the U.S. economy and stock market. This illness abruptly ended the longest economic expansion in U.S. history and shot the unemployment rate up to nearly 15% (the highest it's been in almost 90 years). It also sent the stock market into a dizzying tailspin, with the S&P 500 taking just 17 trading days to fall into bear market territory.
As a result, most sectors and industries have felt the negative effects of COVID-19 -- and that includes marijuana. Despite being one of the fastest growing industries before the coronavirus pandemic, the North American pot industry has struggled with vape pen supply issues (most vape pens are sourced from China), a reduction in tourism to key markets (e.g., Las Vegas), and the cancellation of trade shows. These trade shows were often a breeding ground for dealmaking and showing off new, high-margin products.
But amid this pandemic, three cannabis stocks have actually managed to push higher. Since the S&P 500 peaked on Feb. 19, and through May 12, the following pot stocks have their shareholders wondering, "What bear market?"
First up, we have Scotts Miracle-Gro (SMG -0.51%), which you probably know best for its consumer and commercial lawn and garden care products. Inclusive of a dividend payout on Feb. 24, Scotts' share price has gained more than 14% since the S&P 500 hit its peak.
While it's true that Scotts Miracle-Gro isn't a pure-play pot stock, its subsidiary, Hawthorne Gardening, is becoming a larger component of total sales every year. Hawthorne's product line primarily consists of hydroponic equipment, lighting, and nutrient solutions to U.S. cannabis businesses. Though it has grown organically, Hawthorne's sales certainly received a shot in the arm when it closed on its buyout of Ohio's Sunlight Supply in June 2018 and greatly expanded its product offerings to small-and-medium-sized licensed producers.
In the company's recently reported fiscal second quarter, sales for Hawthorne rose a whopping 60% year-over-year to $230 million, with the traditional U.S. consumer segment bringing in $1.1 billion on 11% year-on-year sales growth. For the remainder of the year, Scotts Miracle-Gro expects companywide sales growth of 6% to 8%, driven almost entirely by a 30% to 35% sales improvement from Hawthorne.
In other words, we're seeing a scenario where Hawthorne might (pardon the apropos pun) grow into a significant component of Scotts' annual sales. As long as Hawthorne is expanding at a double-digit rate, expect Scotts Miracle-Gro to carry an aggressive price-to-earnings multiple.
Neptune Wellness Solutions
When it comes to top-performing pot stocks, none has put more green in their shareholders' pockets since the stock market rolled over than Neptune Wellness Solutions (NEPT 11.97%). Shares of Neptune have gained a cool 52% since Feb. 19.
How on Earth does a relatively obscure small-cap in the ancillary space gain more than 50% during one of the most volatile times in history?
To begin with, Neptune Wellness is at the epicenter of one of the hottest trends sweeping the North American pot industry: derivatives. Derivatives are alternative consumption options, such as edibles, vapes, concentrates, infused beverages, and topicals, and they almost always sport significantly higher margins than dried cannabis flower.
In order to produce derivatives, cannabis and hemp biomass must first be processed for their desired resins, distillates, concentrates, and targeted cannabinoids. Neptune is one of only a small handful of companies that provides extraction services. During the fiscal third quarter, ended Dec. 31, 2019, Neptune reported $2.81 million Canadian in cannabis processing revenue, which more than doubled what it recognized from its cannabis segment in the sequential quarter.
The other catalyst here is that Neptune has repurposed its 24,000-square-foot facility in North Carolina to make and ship more than 1 million units of hand sanitizer each week. Given the emotional trading that's surrounded the coronavirus pandemic, it wouldn't be surprising if Neptune's share price were getting its biggest boost from this tidbit of news, rather than the more-than-doubling in cannabis processing revenue.
Why Trulieve? Without question, the catalyst here is that Trulieve is the most profitable publicly traded pot stock on the planet. Although it's not generating the highest per-share profit, its operating income (as a nominal figure) is higher than any other pure-play marijuana stock, without taking into account fair-value adjustments or one-time benefits. For full-year 2019, Trulieve generated $252.8 million in sales, compared to $89.8 million in cost of goods sold and $76.4 million in operating expenses. That's a no-nonsense operating profit of $86.6 million for the year.
How is Trulieve so profitable? Unlike most vertically integrated MSOs that have tried to penetrate as many legal markets as possible, Trulieve has focused almost all of its attention on medical marijuana-legal Florida. Recently, the company opened up its 47th store in the Sunshine State (it only has 49 open locations nationwide). By keeping its focus close to the vest, so to speak, it's been able to effectively build up its brand and market share without having to spend a fortune on marketing.
Though it's possible that Trulieve Cannabis may have to reestablish its Florida market share if and when the Sunshine State legalizes adult-use weed (a 2022 ballot amendment to do so is likely), it remains the clear profit and market share leader for now.