My Favorite “Alternative” Pot Stock Tripled Already; More Gains to Come?

My Favorite "Alternative" Pot Stock Tripled Already; More Gains to Come?A (Relatively) Safe Way to Invest in the Pot Industry?

What is a pot stock?

There is no official definition, but if you look at the indices that track the marijuana industry, most of the components are companies that grow, process, or sell cannabis (or cannabis-infused products).

By that standard, Scotts Miracle-Gro Co (NYSE:SMG) does not seem to be a pot stock. But it does stand to benefit from the growing legal cannabis industry.

In fact, I’ve liked the company so much that, when the market was having a sell-off in December 2018, I wrote an article titled “Scotts Miracle-Gro Co: A Marijuana Stock You Can Actually Count On.”

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In that piece, I explained why, in that gloomy market environment (December 2018 turned out to be the worst December for the stock market since 1931), Scotts Miracle-Gro stock offered “a relatively safe way for investors to get some exposure to the cannabis industry.”

When the article was published in Profit Confidential on December 6, 2018, SMG stock traded at $66.35 per share. As of this writing, it’s at $229.00 per share, marking a total return of 245%.

In other words, even though the company does not cultivate, process, or sell pot, its share price has more than tripled in just over two years.

Now, you’re probably wondering what Scotts Miracle-Gro Co actually does.

Well, it’s a long story.

In 1868, a man by the name of Orlando M. Scott started a company to sell seed for the agricultural industry. In the early 1900s, the company began selling lawn seed for homeowners. Fast-forward another 100 years and Scotts Miracle-Gro has become one of the largest marketers of branded consumer products for lawn seed and garden care in the world.

Here’s where things get more interesting: Scotts Miracle-Gro Co has a wholly owned subsidiary called Hawthorne Gardening Company, which is a leading distributor of hydroponic products in North America. In particular, Hawthorne sells nutrients, lighting, growing media, supplements, and other materials used in the indoor and hydroponic growing segment. Notably, the company serves both hobbyists and commercial growers.

People can use hydroponic equipment to grow lettuce and tomatoes, but it’s very clear that Hawthorne focuses on serving the cannabis industry.

In a 2016 interview, Hawthorne’s general manager, Chris Hagedorn, said, “Right now, we’re squarely focused on what’s made this business successful: high-value crops.” (Source: “How One of America’s Most Visible Fortune 1000 Giants Quietly Snuck Into the Cannabis Industry,” The Cannabist, September 22, 2016.)

Of course, Hawthorne is just a subsidiary, but it has been a huge contributor to the growth in Scotts Miracle-Gro Co’s overall business.

Just take a look at the company’s latest earnings report and you’ll see what I mean.

In the fourth quarter of Scotts Miracle-Gro’s fiscal year 2020, which ended September 30, 2020, Hawthorne’s sales surged by 68% year-over-year from $210.0 to $351.9 million. (Source: “ScottsMiracle-Gro Announces Record Fourth Quarter and Full Year Results Driven by Strong Product Demand in Both Major Reporting Segments,” Scotts Miracle-Gro Co, November 4, 2020.)

Considering that company-wide sales totaled $890.3 million for Scotts Miracle-Gro in the fourth fiscal quarter, Hawthorne was responsible for nearly 40% of its parent company’s total top line.

In Scotts Miracle-Gro’s full year fiscal 2020, Hawthorne generated $1.1 billion in sales, representing a 61% increase from the previous fiscal year. That was thanks to strong demand in both new and legacy markets. The subsidiary’s growth helped drive Scotts Miracle-Gro’s total sales up 31% year-over-year to $4.1 billion in its fiscal 2020.

The company is also profitable. Scotts Miracle-Gro Co’s adjusted earnings, which exclude impairment, restructuring, and other one-time items, came in at $7.24 per share in its fiscal 2020. The amount marked a substantial improvement from the $4.47 per share it earned in the prior fiscal year.

Mind you, cannabis was not the only growth driver. Another reason why Scotts Miracle-Gro achieved tremendous financial improvement recently was the stay-at-home environment caused by the COVID-19 pandemic.

When people had to stay home, many of them spent more time gardening. So the demand for the company’s lawn and garden care products increased. In particular, Scotts Miracle-Gro Co’s U.S. Consumer segment’s sales grew 90% year-over-year in the fourth fiscal quarter and 24% for the entire fiscal year.

Of course, the pandemic will end eventually and consumer behavior will return to normal. But cannabis could be a long-term catalyst for Scotts Miracle-Gro stock. For the company’s fiscal year 2021, management expects company-wide sales growth to be in the range of zero to five percent. The subsidiary, Hawthorne, on the other hand, is projected to deliver sales growth of 15% to 20%.

Scotts Miracle-Gro Co (NYSE:SMG) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Scotts Miracle-Gro Co’s rising share price certainly looks good, but capital gains are not the only return that SMG stock investors have collected over the years. The company also dishes out cash dividends.

Scotts Miracle-Gro stock currently pays quarterly dividends of $0.62 per share. Over the past five years, its quarterly dividend rate has increased by 31.9%. The company also rewarded shareholders with a hefty special dividend of $5.00 per share in September 2020. (Source: “Dividend History,” Scotts Miracle-Gro Co, last accessed January 25, 2020.)

These days, pot industry news is mostly about cannabis producers. While Scotts Miracle-Gro is not one of them, it has the potential to deliver further returns to investors as an “alternative” pot stock.