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Low-Risk Way Bet on the Marijuana

08/11/2017 2:50 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

One of the most exciting new trends is the legalization of marijuana use in various states. Almost 30 states have legalized weed and a dozen more are considering it, asserts Mark Skousen, editor of Forecasts & Strategies.

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The Senate has introduced legislation to decriminalize marijuana sales, although it faces opposition by attorney general Jeff Sessions. Next year, its use will be legal in all of Canada.

North American legal sale of cannabis is expected to more than triple from $6.9 billion in 2016 to nearly $22 billion by 2021, and perhaps even $50 billion by 2026.

As a result, hundreds of “pot” penny stocks have entered the marketplace. However, most are money losers. Here’s a way to profit without taking high risks in an over-hyped industry — invest in Scotts Miracle-Gro (SMG), the Ohio-based lawn and garden care company.

Scotts is tops for fertilizing lawns and improving gardens and landscaping. Its Scotts, Turf Builder, Ortho, Roundup and Miracle-Gro brands are among more than three dozen brand-name products in the company’s product portfolio.

Revenues have risen pretty dramatically over the past 10 years to $2.85 billion. Profit margins exceed 10%, and return on equity (ROE) is 30%. The company just beat Street estimates by earning a profit of $2.53 per share on $1.1 billion in revenues.

It is selling off its international division in Europe and Australia and concentrating on the U.S. market. It has a rising dividend policy and is currently paying 50 cents per share (2% yield).

What’s the marijuana connection? Scotts has expertise in improving plant growth, and the expansion of medical and even recreational cannabis is opening the door for its subsidiary Hawthorne Gardening to provide soil, nutrient, lighting, and hydroponic solutions to aid in the growth and yield of medical marijuana crops.

There are two risks to investing in Scotts Miracle-Gro. One is valuation at 20 times earnings and $2 billion in debt. The other is the possibility that the federal government will crack down on marijuana use.

Fortunately, since Scotts doesn’t depend heavily on its hydroponic market, it won’t be hurt much by a negative decision. We've added Scotts Miracle-Gro to our portfolio in order to watch it grow.

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