Are you a cannabis investor looking for a quality stock to add to your portfolio? Then you probably know how challenging it can be to find a marijuana investment that's both profitable and trading for cheap. But with a little digging, it's clear that there are still some great opportunities for you to benefit from its inevitable growth.
Two pot stocks you can hold heading into 2021 that will give you a good balance of growth and profitability are Scotts Miracle-Gro (SMG 1.02%) and Village Farms International (VFF 13.22%). Both stocks are up more than 63% this year and have outperformed both the Horizons Marijuana Life Sciences ETF that's down 9% and the S&P 500, which has had an up-and-down stunning year, end up about 17%. Here's a look at why these stocks are still solid buys next year.
Image source: Getty Images.
1. Scotts Miracle-Gro
Scotts Miracle-Gro is a safe business to invest in if you just want to dip your toes in the cannabis industry. Since it's not a pot producer, you don't need to worry about constant revaluations and the frequent gains or losses that can distort a cannabis company's earnings results. Scotts is known for its gardening business, but in recent years its Hawthorne segment is what's made the stock a hot buy, driving much of the company's growth.
Hawthorne provides companies with hydroponic gardening equipment to help grow cannabis. A hydroponics system uses pipes and pumps and only takes up a fraction of the space a garden or greenhouse would. It also doesn't require soil, making it easy for anyone to grow cannabis, even inside their own homes. That's why Hawthorne's products are in demand by both consumers wanting to cultivate marijuana themselves and by businesses looking for ways to make their operations more efficient.
On Nov. 4, the Ohio-based company released its year-end results for the period ending Sept. 30. Revenue of $4.1 billion was up 31% from a year ago as the company benefited from a surge in both of its key segments. Its U.S. consumer segment, which features its conventional gardening products, grew 90% in the fourth quarter and was up a total of 24% for the full fiscal year. A big reason for the spike is that with more people spending time at home during the pandemic, gardening activities grew in popularity. Meanwhile, the company's Hawthorne business continued to generate strong numbers; the segment was up 61% over the whole year and 68% in Q4. Overall, Scotts reported a profit of $388.6 million in fiscal 2020, down 16% from the prior year. The company says this was mainly due to a difference in non-operating income.
Although there is reason to hope that the pandemic may be ending now that vaccines are available for COVID-19, it's a process that will take at least several months. And with lockdowns in place across the country and cases of COVID-19 continuing to rise, people are still likely to spend a lot of time at home in 2021, which could mean gardening tools and equipment remain in strong demand.The Hawthorne business is also a safe bet on growth in 2021. Four new states -- Arizona, Montana, New Jersey, and South Dakota -- passed legislation in November to legalize recreational marijuana use, which is likely to push up the demand for the cultivation of cannabis.
The stock is also a relatively cheap buy given its sales numbers, trading at a price-to-sales (P/S) multiple of less than three, which compares favorably against other high-growth cannabis stocks, including Innovative Industrial Properties and GrowGeneration:
SMG PS Ratio data by YCharts
With a cheap valuation, a profitable business, and lots of growth still to come, Scotts is a top cannabis stock to own in 2021 and beyond.
2. Village Farms
If you're after a true pot producer, consider adding British Columbia-based Village Farms to your portfolio. Over the past nine months, the company reported sales of $122.7 million, which grew 10% from the same period last year. And it generated a profit of $4.6 million during that time. While that's down from $9.5 million a year ago, Village Farms' numbers could look a lot better in 2021.
That's because on Nov. 2, the company announced it completed the acquisition of Pure Sunfarms. The company already owned a majority (58.7%) stake in the business, but after buying out Emerald Health's ownership for $60 million, Village Farms now owns 100% of the low-cost greenhouse operation. By fully owning the business, Village Farms can benefit from Pure Sunfarms' profits in their entirety, and longer needs to split them with Emerald Health. Pure Sunfarms has turned a profit for seven straight periods.
Despite its gross margins falling from 75% to 40% in the past year, Pure Sunfarms still generated a profit of $9.4 million over the nine-month period ending Sept. 30. Although that's down 61% from the $24.1 million profit the company generated a year ago, it will still help pad Village Farms' bottom line.
Compared to other notable Canadian pot stocks, including Canopy Growth, Aurora Cannabis, and HEXO, Village Farms stock also looks like a cheap buy when factoring in their respective sales numbers:
CGC PS Ratio data by YCharts
Village Farms is a hot buy heading into 2021 as the inclusion of Pure Sunfarms into its operations only makes its business more competitive.
