If You Want to Own a Safe Marijuana Stock, Read This
Something big just happened in the markets.
If you are a marijuana stock investor (actually, if you are an investor of any financial asset), what just happened could have some serious implications.
I’m talking about the inversion of the yield curve. On December 4, the yield on the five-year Treasury note dropped below the yield on the two-year Treasury note.
In other words, the interest rate on the long-term bond got lower than the rate on the short-term bond.
Now, you are probably wondering, “How do pot stocks have anything to do with this change in the interest rate environment?”
Well, the answer is simple. An inverted yield curve is very rare, and is often considered a predictor of economic recessions.
According to Bespoke Investment Group, “In a longer range chart going back to 1962, there has never been a recession that wasn’t preceded by an inversion of the yield curve.” (Source: “The ‘yield curve’ explained and whether it really is a barometer for the economy and markets,” CNBC, December 4, 2018.)
Jeffery Gundlach, known as the “Bond King,” recently said that the “economy is poised to weaken” after the yield curve inversion. (Source: “DoubleLine’s Gundlach says Treasuries point to economy ready to weaken,” Reuters, December 4, 2018.)
Given the uncertainties that already exist, such as trade negotiations, commodity prices, and ongoing geopolitical tensions, an economic recession would most definitely lead to a stock market crash. It doesn’t help the case that valuations of U.S. equities are near the higher end of their historical averages.
That’s why, if you are looking for marijuana stocks, you want to find companies that won’t drop to the floor in the next sell-off.
With that in mind, meet Scotts Miracle-Gro Co (NYSE:SMG).
A Marijuana Stock You Likely Haven’t Considered
Scotts Miracle-Gro Co is a multinational manufacturer and marketer of consumer products for lawn and garden care. Based on this description, SMG doesn’t really look like the typical marijuana stock.
Still, despite not being a pure play in the cannabis industry, the company deserves the attention of marijuana stock investors.
You see, one of Scotts Miracle-Gro’s subsidiaries is Hawthorne Gardening Company, which started out with a mission to “meet the demands of hydroponic growers (a.k.a. cannabis growers) across the nation.” (Source: “Is the Hawthorne Gardening Company a Wolf in Sheep’s Clothing for the Cannabis Industry?” Merry Jane, October 5, 2016.)
Today, Hawthorne offers multiple market-leading brands in nutrients, supplements, air handling, and lighting equipment designed for hydroponic growing.
SMG’s recent acquisition of Sunlight Supply Inc. further expanded its portfolio and created a direct distribution model that allows Hawthorne to serve more than 1,800 hydroponic retailers throughout the country. (Source: “ScottsMiracle-Gro to Acquire Sunlight Supply Inc., Marking Major Step Forward in the Evolution of The Hawthorne Gardening Company,” Scotts Miracle-Gro Co, April 17, 2018.)
Business has been booming at SMG’s cannabis segment. In the quarter ended September 30, Hawthorne generated $152.2 million in sales, representing a whopping 65% increase year-over-year. (Source: “ScottsMiracle-Gro Announces Fourth Quarter and Fiscal 2018 Results; Full-Year Sales and Earnings in Line with Guidance,” Scotts Miracle-Gro Co, November 7, 2018.)
Solid results from Scotts Miracle-Gro’s marijuana-related business helped boost company-wide sales by 15% from a year ago to $433.9 million in the September quarter.
Don’t forget, SMG is not just about hydroponic growing equipment. The company also has a portfolio of established brands in lawn and garden care products. These brands, such as “Miracle-Gro,” “Scotts,” and “Ortho,” are proven to generate recurring cash flows for the company.
Keep in mind that Scotts Miracle-Gro has been around for well over a century. And while its core business doesn’t seem as exciting as its cannabis segment, the company’s entrenched position in the lawn and garden market means SMG stock probably won’t crash as much as the high-flying weed stocks when investors turn to risk-off mode in the next market sell-off.
If you’ve been following my column here at Profit Confidential, you’d know that I prefer marijuana stocks that can pay you cash with certainty. The reason is simple. With pot stocks being some of the most volatile tickers in today’s market, earning a cash return with certainty can provide peace of mind.
As it turns out, Scott Miracle-Gro Co can provide that peace of mind due to its generous dividend policy.
The company has a quarterly dividend rate of $0.55 per share, which comes out to an annual yield of around three percent. Over the last five years, SMG stock’s payout has grown by over 25%. (Source: “Scotts Miracle-Gro Company (The) Dividend Date & History,” Nasdaq, last accessed December 5, 2018.)
There you have it. Given what happened recently, the outlook for the stock market has gotten gloomier, to say the least. In this kind of environment, Scotts Miracle-Gro Co offers a relatively safe way for investors to get some exposure to the cannabis industry.