2 Pick-and-Shovel Marijuana Stocks That Could Make You Rich

You don't have to invest directly in a dispensary operator or a big grow operation to play the marijuana sector.

In this video segment from Motley Fool Live, veteran Motley Fool contributor Eric Volkman and healthcare and cannabis bureau chief Corinne Cardina identify a pair of solid pick-and-shovel companies poised to profit handsomely from the greening of America. This discussion was recorded on Feb. 5, 2021.

Corinne Cardina: We're going to turn now to our pick-and-shovel stock picks. Of course, these are companies that are not directly involved in producing and selling cannabis, but they sell services or products needed for the companies that do. What is the first one that you are bullish on?

Eric Volkman: The first one is a relative newcomer. They are called GrowGeneration (GRWG -4.47%).

What does GrowGeneration do? They specialize in hydroponics supplies. For those who don't know, hydroponics is the growing of crops -- or the growing of anything -- without soil. Because you don't have soil, you need a lot of equipment that basically circulates and regulates water levels -- pipes and trays and things like that. There's a lot of gear involved.

These guys, GrowGeneration, they are a pure hydroponics retailer. Because more weed is being grown, they're obviously a play on the facilities that are going to need this sort of equipment. For example, if you have a giant factory and you want to grow, and cultivate, and process weed, you need a fairly sophisticated set of hydroponic assets. You can't just have this giant patch, like acres and acres large of dirt, it's not going to work. You have an indoor facility, you need a lot of this equipment.

GrowGeneration runs, operates, and manages a network of hydroponics stores. They keep getting bigger. They keep making acquisitions [and] they keep making acquisitions in strategic places.

Recently, at the end of last year, they made a big play in Arizona. Arizona, of course, was one of the states in the so-called Green Wave last Election Day, which the voters voted to legalize recreational marijuana. The state is just awarding retail licenses now. GrowGeneration, their timing is very good. They got in there a couple of months before the recreational legalization officially happened. They are very well positioned.

They also made a deal in Michigan, so they are now a presence in that market. You see how they're, bit by bit, establishing a presence in the states. They didn't pay too much. In terms of their balance sheet, they're still in pretty good shape. They're not heavily overburdened with debt, so there's still room for them to continue adding by acquisition, which is their strategy.

There's some pretty nice runway there. I don't see any other company that's comparable to them, at least not publicly traded, being this active with expanding their footprint and becoming a bigger presence.

I can easily see GrowGeneration getting to the point where they are, if not exclusively identified with hydroponics retail, at least like one of the first name that you think of if you're in the business and you're thinking of finding this equipment.

Cardina: Yeah. They seem to come out of nowhere. Their stock is up more than 1,000% if you look over the past year, but it's still only at a $3 billion dollar market cap. Interesting to position that compared to the second pick-and-shovel stock we're going to talk about, which is a $13 billion market cap. What stock is that, Eric?

Volkman: That stock is Scotts Miracle-Gro (SMG -0.09%). That's been seen as kind of the classic -- if we can use that word -- the classic, pick-and-shovel play for the marijuana sector. Because Scotts Miracle-Gro, for quite some time now, has had a subsidiary called Hawthorne, which is a growing equipment purveyor. They've been lumped in for years now with the marijuana sector.

Scotts Miracle-Gro, in many ways, is like a classic old-line company. For years, they've been pretty narrowly focused on their niche, which is gardening supplies, basically. With Hawthorne, it wasn't that much of a leap for them in terms of business strategy and in terms of corporate focus.

But Hawthorne, I did have the growth rates for them... Yeah, Hawthorne. In their most recently reported quarter, Hawthorne, just as a subsidiary, grew its revenue by 61%. Sorry, that's for full year, 2020, not the most recently reported quarter. But again, 61% and overall revenue for Scotts Miracle-Gro rose by 31%. That means Hawthorne, obviously, is the engine of growth there. They are the part of the company that's motoring ahead.

But overall, both those numbers are nice. I'll take a 31% revenue growth rate for any company anytime. Again, Scotts Miracle-Gro is going into a situation where the marijuana industry, one way or another, sooner or later, is going to expand. Whether it's just two more states legalizing this year because the Federal Government pushed decriminalization down the priority ladder, or if this decriminalization, excuse me, actually happens at the Federal level, then yeah, you're going to see a lot more people buying a lot more equipment.

So Scotts Miracle-Gro, it's just naturally a very good play. It's a company that's in good shape, professional, very experienced management, and if I'm not mistaken, currently, they do pay dividend. Let me look that up on the magic Internet machine.

Cardina: And they're profitable. Their earnings per share diluted is more than eight dollars, which is far more than you can say for pretty much any of the companies we just talked about.

They do have a dividend, it says that it yields 1.05%, on Yahoo! Finance, so the dividend is about 2.48, if you look at forward. There's your potential income play. Obviously, 1% dividend yield is lower than the average S&P dividend, and there are bigger dividends you can find out there, particularly Innovative Industrial [Properties] (IIPR 0.06%), but it's a nice little bonus, for sure.

Volkman: It's huge for the marijuana industry. It is so rare for any marijuana stock to spit out a dividend.

The only other one we should mention, notably, is Innovative Industrial Properties. They pay a dividend because they are required to. They're a real estate investment trust, they're legally obligated.

But yes, the fact that these guys have a dividend, you're not going to buy Scotts Miracle-Gro simply because of that, but it's a nice additional bonus. It gives you a little bit of cash flow with your investment.