If Markets Tumble, This Pot Stock Could Outperform

Scotts Miracle-Gro Co If Markets Tank, This Pot Stock Could Outperform
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A Pot Stock You Likely Haven’t Considered

With multiple pot stocks making astronomical gains in the past two years, many investors are wondering what would happen if the market turns south. I mean, in a market crash, there has been a tendency for investors to first sell their stocks that went up a lot.

While no one can predict stock price movements with certainly, there is one pot stock that could outperform its peers in the event of a market pullback: Scotts Miracle-Gro Co (NYSE:SMG).

Headquartered in Marysville, Ohio, Scotts Miracle-Gro is one of the world’s biggest manufacturers and marketers of consumer products for lawn and garden care. The company’s history can be traced all the way back to 1868. Yet despite its age, SMG has managed to climb on board the marijuana profit train.

The secret lies in the company’s subsidiary, Hawthorne Gardening Company, which provides nutrients, supplements, lighting, and other materials for hydroponic growing.

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Scotts Miracle-Gro Co Is Making Money From the Marijuana Boom

To see how Scotts Miracle-Gro has been capitalizing on the boom in the marijuana industry, all you need to do is taking a look at its latest earnings report.

In the third quarter of SMG’s fiscal-year 2019, which ended June 29, the company’s Hawthorne Gardening segment delivered $176.3 million in sales, representing a staggering 138% increase from the $74.2 million earned a year earlier. (Source: “ScottsMiracle-Gro Announces Third Quarter Results and Raises Guidance; U.S. Consumer and Hawthorne Segments Continue to Show Strong Growth,” Scotts Miracle-Gro Co, July 31, 2019.)

While the revenue increase was primarily due to Scotts Miracle-Gro’s acquisition of Sunlight Supply in June 2018, the Hawthorne segment’s comparable revenue growth was a very impressive 49%.

Thanks to contributions from this pot-oriented segment, Scotts Miracle-Gro’s company-wide sales grew 18% year-over-year to $1.2 billion in the third fiscal quarter. Excluding special items, the company’s adjusted earnings came in at $3.11 per share, marking a 16.5% improvement from the year-ago period.

While many pot companies have been recording big losses quarter after quarter, the fact that Scotts Miracle-Gro Co already has positive bottom-line results could make SMG stock more resilient in a market pullback.

And the best could be yet to come. In the company’s latest earnings release, management raised their guidance. For full-year fiscal 2019, they expect Scotts Miracle-Gro to earn an adjusted profit of $4.35 to $4.50 per share while delivering sales growth of 16% to 17%.

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

Chart courtesy of StockCharts.com

Analyst Take

At the end of the day, Scotts Miracle-Gro Co is not a pure-play pot stock. However, its share price performance, especially this year, has been quite impressive—even by cannabis industry standards. Year-to-date, SMG stock has surged more than 80%.

Since pot stocks have soared, there is a concern that the cannabis industry might be one of the first to enter a sell-off once market sentiment turns bearish.

And that’s where Scotts Miracle-Gro might be able to stand out. Because the company still makes billions of dollars of revenue outside of its pot segment, SMG stock could hold its investor appeal even if sentiment turns bearish toward the marijuana industry.