Cannabis stocks have had their ups and downs over the past year. Joe Biden’s Democrat win in the US presidential election caused cannabis stocks to surge. Soon after, a Reddit-induced rally saw them hit record highs, and then a dizzying drop. I don’t think all Reddit stocks are made equal. However, with the potential for explosive growth, here’s one cannabis stock I’d buy right now.
Across North America, there seems to be a steady march towards decriminalising the possession and sale of marijuana. Many US states have legalised recreational cannabis use, including the most populous state, California, back in 2016. In Canada, recreational cannabis has been legal since 2018, while Mexico allows cultivation for personal use.
I think there’s been a cultural shift where using cannabis is now as socially permissible as tobacco. Tobacco companies including Imperial Brands and British American Tobacco are some of the highest performing dividend stocks available. Cannabis stocks could soon be just as profitable.
Miracle cannabis stock?
Scotts Miracle-Gro (NYSE: SMG) used to only sell generic gardening equipment. Now, thanks to its subsidiary, Hawthorne Gardening Company, it offers everything that cannabis growers need to farm their product. This includes grow lights, fertiliser, and hydroponic nutrient solutions.
Revenue was $4.1bn for FY2020, which was up by 31% year-over-year. Hawthorne generated $1.1bn of these sales, representing a 61% increase year-over-year.
By Q3 2021, the company brought in $1.6bn in revenue, an 8% rise year-over -year. Moreover, the Hawthorne division saw revenue surge 48% from $285.7m to $421.9m. As more states loosen their cannabis laws, there’ll be an increasingly large market to capture. And as a industry supplier, it doesn’t have the same risks of dealing with changing tastes or crop failures.
Acquisitions and growth
The company has been on an investing splurge. Last week, Hawthorne invested $150m into Canadian RIV Capital, which is planning to move into the US market this year. Yesterday, the company announced it has invested $3.2 million into Dewey Scientific, an agricultural technology company that specialises in improving the genetic diversity of cannabis crops.
It’s also spending another $65m acquiring HydroLogic Purification Systems, which sells water filtration and purification solutions to corporate cannabis growers.
After releasing Q3 2021 results, CEO James Hagedorn said that “this industry is poised for significant growth. And given our track record, I believe we have an absolute right to win here.” He expects revenue growth of between 17% and 19% for FY 2021, with Hawthorne’s sales rising between 40% and 45%.
Potential side-effects
The day Q3 2021 results were released, SMG stock tumbled by 6.7%. The share price has been falling consistently since April, and could fall further before stabilising.
There’s also the risk that future state legislatures might roll back decriminalisation. Some banks and venture capital funds refuse to lend to cannabis companies because of this future legal uncertainty. Cannabis companies often get around this by creating more shares to raise capital. This results in share dilution, which reduces the value of pre-existing shares. This is exactly what happened with competitor Sundial Growers. Its share price rallied to $252 in April, spurred on by Reddit investors. It has since fallen to a more realistic price of $150.
With a price-to-earnings (P/E) ratio of only 15, Scott Miracle-Gro is still the cannabis stock I’d buy for my portfolio.
