The big issue is most likely cost. Without having to deal with taxes and regulation, illicit marijuana is cheaper. It’s similar to the idea of buying cigarettes from lower-tax regions to sell in higher-tax ones. It’s not legal, but evading taxes leads to lower selling prices and/or higher profits for the cigarette seller. Since illegal marijuana growers were already breaking the law before pot was legal, the fact that they are continuing to meet the demand for low-cost weed shouldn’t be surprising. But it could be a thorn in the side of companies that are hoping to see huge growth in the legal marijuana market.
The problem is that investors have a bad habit of getting too excited in the early days, pushing story stocks up to unrealistic heights. The recent declines in marijuana growers suggests that’s happened again. Here’s why Scotts Miracle-Gro (NYSE:SMG) didn’t get hit, and why it may be a better option for long-term investors interested in the space.
What’s exciting is that it doesn’t matter who is winning the marijuana market-share war; Scotts can provide them all with the tools and supplies they need. As pot companies come and go, it will still benefit from increasing end-market demand, which brings up an interesting statistic.
However, instead of growing the plant, it stuck to its knitting and bought its way into the hydroponic supply space. The facilities in which marijuana is grown generally use hydroponic systems. At this point, Scotts is one of the biggest players in the hydroponic niche, with sales of $176 million in its hydroponics-focused Hawthorne division in its most recent quarter. That’s an annual run rate of around $700 million. This is a big business — and it’s growing, with management estimating that organic sales were up nearly 20% year over year through the first nine months of fiscal 2019 (recent acquisitions have pushed overall sales at Hawthorne up even more).
A winner either way
Image source: Getty Images.
Legal marijuana is expected to be a huge growth business, with some projecting a market opportunity of as much as $166 billion. That’s many years away, since the industry is still largely in its infancy. But the projection shows just how excited Wall Street is about legal weed.
That last point is important: There are a lot of companies looking to get a piece of the marijuana market. Sure, Canopy is a big player, but it isn’t the only player. which is where Scotts Miracle-Gro comes in. This company has long served the slow-and-steady lawn care market, helping people grow and maintain pretty yards and flowers. A few years ago, management decided it wanted a piece of the marijuana market, too.
Although not a pure play on pot, Scotts Miracle-Gro's approach to the space may give it more opportunity than a grower if this trend holds up
When you buy a marijuana grower like Canopy Growth, you are making a direct bet on the future of legal pot. It is a notable player in the space, but its future won’t be nearly as bright as hoped if legalization doesn’t continue to spread across the United States. Its entire future is basically tied to more people taking advantage of the legal opportunity to use marijuana. That’s not bad or different from any of the other pot stocks; it’s an issue they all face as they compete for market share.
Scotts Miracle-Gro, on the other hand, benefits either way. Sure, it would rather sell to people who are operating on the up and up. But anyone can buy hydroponic supplies from the company, which means that Scotts not only wins as legal marijuana production grows (no matter which companies end up being the big players), but can also benefit from illegal marijuana growers fighting to stick around.
Many of us have grown up seeing Miracle-Gro being used in our homes, so we know that it works for ‘regular houseplants’. Cannabis is just a tough weed, so Miracle-Gro should be great for it, right?
Important: Do not use “Miracle Gro” soil or any soil that has “extended release” nutrients. These types of soil will continue to release nitrogen to your plant roots for up to 6 months. This can burn your cannabis plants in the flowering/budding stage and reduce your overall yields.
There’s nothing inherently wrong with Miracle-Gro nutrients, and if you’re willing to learn about nutrients, you can use the various different formulas and get a cannabis plant to grow. For example if you’re using regular soil, you could use the standard Miracle-Gro formula for vegetative, and their “bloom” version for the cannabis flowering stage.