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 investor 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 the 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 still managed to climb onboard the marijuana profit train.

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

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

Scotts Miracle-Gro Co: Making Money from the Marijuana Boom

In the third quarter of SMG’s fiscal year 2019, which ended June 29, the company’s Hawthorne segment delivered $176.3 million in sales, representing a staggering 138% increase from the $74.2 million earned a year ago. While the increase was primarily due to the acquisition of Sunlight Supply in June 2018, Hawthorne segment’s comparable revenue growth was still a very impressive 49%. (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.)

Thanks to contributions from this pot-oriented segment, Scotts Miracle-Gro Co’s company-wide sales grew 18% year-over-year to $1.17 billion in the third fiscal quarter. Excluding special items, SMG stock’s adjusted earnings came in at $3.11 per share, marking a 16.5% improvement from the year-ago period.

When many pot companies are making 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 latest earnings release, management also raised their guidance. For full-year fiscal 2019, they expect the company 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 Co 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 when sentiment turns bearish towards the marijuana industry.