The recent ruling by the South Dakota Supreme Court that struck down a voter referendum approving legalized marijuana shows the difficult road ahead for cannabis stocks in dealing with state-by-state approvals. A cohesive, national policy is required.
That's why the introduction of a Republican-sponsored bill to legalize pot at the federal level is an important development. It could point the way toward a bipartisan agreement. But whether marijuana remains a patchwork quilt of state sanction or it gets the nod nationally, the following three cannabis companies are ones to buy right now.
What's not to like about rising revenue and widening margins?
Alex Carchidi (Scotts Miracle-Gro): I'd be willing to buy a few shares of Scotts Miracle-Gro (SMG 2.79%) without hesitation because it's a highly diversified business that makes the gardening tools and plant nutrients that marijuana growers need to keep making money.
As a result of hot demand from newly opened cannabis facilities, its cannabis cultivation equipment subsidiary, Hawthorne, is driving much of the company's top-line growth. Though its sales contracted by 2% year over year for Q4, Hawthorne's full-year revenue for 2021 grew by 39%, which isn't half bad. Similarly, because of the strong seasonality of Scotts' consumer gardening segment, fourth-quarter revenue dipped 17%, but companywide sales for the year grew by 19%.
As the marijuana industry in the U.S. continues to grow, it'll continue to need the gear Hawthorne provides in greater and greater quantities. Plus, if consumers need to buy cannabis year-round, Hawthorne will need to sell growers the right gear every quarter, which could reduce some of the seasonality that I suspect scares some investors away from Scotts' stock.
Right now, there's every indication that the company will rise to meet the marijuana boom and reward its shareholders in the process. Scotts is improving its efficiency over time across several metrics while committing to another round of share repurchases worth up to $300 million in 2022. Over the past five years, its annual profit margin has risen by nearly 26%, reaching its current level of 10.41%. And its annual return on invested capital (ROIC) rose by 70.3% in the same period, reaching 18.53%. That means the company is getting better at squeezing more money out of both its operations and its equity from sources such as shareholders.
In short, Scotts has the right set of products in the market at the right time, and it has a history of pulling through for its shareholders over the long term. For me, there's nothing better.
Thumbs up for this bargain weed stock
Eric Volkman (Green Thumb Industries): Pot companies with a strong retail presence will be the first ones to benefit when federal cannabis law is reformed, or several more states flip the switch on recreational legalization. Granted, neither is likely to happen anytime soon, but Green Thumb Industries (GTBIF -0.80%) is a company beautifully poised to leap on the opportunity.
In many ways, Green Thumb is a bellwether retail-facing pot stock, as it's among the top three U.S. multistate operators (MSOs) in terms of revenue, along with rivals Curaleaf and Trulieve Cannabis. It also bucks the money-losing MSO standard by being consistently in the black of late, with five consecutive quarters of bottom-line profitability.
In fact, Green Thumb did smashingly well in its most recently reported quarter. Its Q3 revenue came in at $235 million, 49% higher year over year and 5% better than the Q2 result. Net profit leaped even further ahead; at $21.6 million it was more than double the year-ago figure, although it represented an 8% decline from the previous quarter.
Among the major U.S. MSOs, in my opinion Green Thumb has one of the best geographic footprints.
This starts with its own home state, Illinois, in which recreational weed got off to a roaring start when it became law at the beginning of 2020. In October, the state surpassed $1 billion in year-to-date recreational sales. That's well above the total for the entirety of 2020, which was only $669 million. Green Thumb's Rise is a go-to dispensary in the state, with nine locations.
Green Thumb's retail presence covers not only established locales such as Illinois, but also ones that have yet to establish their recently legalized recreational markets. There are three Rises apiece in both New York and New Jersey, and a pair in Virginia.
Pot stocks aren't the flavor of the month just now, because of the more-stop-than-start nature of U.S. decriminalization/legalization. Green Thumb stock has been unfairly punished in the process, but that provides opportunity for investors to snap up the shares at a relatively cheap price -- they're down by nearly 40% from their one-year peak, after all.
All the pieces are in place for a big growth spurt
Rich Duprey (GrowGeneration): I like GrowGeneration (GRWG 6.49%) for much the same reason my colleague Alex like Scotts Miracle-Gro -- it's a picks-and-shovels cannabis company that can win regardless of which pot stocks actually grow the fastest.
As the country's largest specialty hydroponic and organic garden center supplier, GrowGeneration sells to marijuana growers the required supplies and equipment they need to produce pot for sale, particularly within its own line of branded products, such as Char Coir coconut coir and Power Si plant additives.
Although it operates a network of 62 stores across 13 states -- it plans to expand in 2022 to all 18 states that have adult-use laws in effect -- GrowGeneration's products are sold in third-party outlets as well.
Power Si, for example, is available in 500 independent hydroponic locations across the U.S., and it now sells across Canada, the U.K., and Europe. That's helping push sales higher, which more than doubled in the third quarter to $116 million as comparable sales were up nearly 16% from last year.
Despite its success, the market has punished GrowGeneration. Its stock is down 25% since it reported earnings on Nov. 11, and shares have lost nearly three-quarters of their value from the highs they hit back in February.
Even as it saw net profits grow 20% from last year as adjusted earnings of $0.18 per share were 38% above the year-ago figure (and double the consensus estimates), adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $10.8 million fell short of analyst expectations, although it was a record amount for GrowGeneration.
Guidance also weighed on the stock, as fourth-quarter sales and profit margins will be pressured by an oversupply situation in California, the largest marijuana market.
Good for investors! Wall Street forecasts that GrowGeneration will quadruple sales by the middle of the decade while EBITDA will expand fivefold. That makes the cannabis supplier company a discounted play and one investors might not want to wait too long to buy.