Backdoor Marijuana Investment Play

Scotts Miracle-Gro (SMG), a company that is best known for Scotts branded products like fertilizers and grass seeds, is also a backdoor marijuana investment play.

Most marijuana investors know this, but they may not fully understand how Scotts is involved in the marijuana industry and why that could make Scotts slightly more of a risky investment than some people believe it to be.

Scotts Miracle-Gro is a very well-known business and it has a good reputation. However, its core business is not one that is typically booming.

Over the past ten years, prior to 2020, Scotts average sales grew just 2%. This shouldn’t bee much of a surprise considering the business the company is in. Furthermore, the average 2% sales growth could in many years be contributed to nothing more than price increases.

Then came 2020, when people where stuck at home, looking at their poorly maintained lawns and starting gardens. Due to increased demand, likely because of pandemic-related changes to people’s lives, Scotts' annual sales increased by 24%.

Company management and analysts all believe that most of the people who took up gardening or did decide to improve their yard, will continue to stick with Scotts and their new hobby.

With that said, analysts are only expecting Scotts' sales growth to be in the 2-4% annual growth range during the coming years. Not the kind of growth you may expect from a high-flying marijuana stock.

Scotts has exposure to the marijuana industry through its fertilizers and the basic equipment needed to set up a marijuana farm.

Back in 2014, Scotts formed the Hawthorne Gardening Company, which sells products used by cannabis growers. Then in 2015, Hawthorne bought General Hydroponics, a 35-year-old liquid nutrient producer, of which its products are considered the gold standard by many marijuana farmers.

While the Hawthorne Gardening Company does sell fertilizer, due to its acquisition of General Hydroponics, the growth in the division comes from new marijuana growing facilities being opened.

So as the pace of legalization of marijuana in US States and major countries around the world slowly diminished, the need for new hydroponic growing equipment that Hawthorne sells also began to drop.

More recently the marijuana industry has been in an ‘oversupply’ situation. This not only nearly stopped all sales from Hawthorne, but it also hurt Scotts' sales figures. With annual sales growth dropping from 24% to a more expected 2-4%, Scotts' stock price has taken a massive hit, falling from a 52-week high of $193.50 down to currently trading in the low $80 range.

Some investors argue that now is the time to buy SMG because of the low valuation, decent dividend and potential for the marijuana industry to make another move forward.

For that to happen, we will need to see one of two things to occur:
1. A massive increase in marijuana usage in the states that it is legal, or
2. New states in the US or countries around the world open their doors to the marijuana industry.

Either of these situations would increase demand for marijuana, thus new grow houses would need to be built and supplied so they can begin growing marijuana. Without either happening, Scotts' Hawthorne business will continue to produce just mediocre numbers.

Some investors believe that SMG is undervalued, and that very well may be true. If the marijuana industry continues to grow in the future and we see more and more US States and countries around the world legalize the substance, then Scotts' Hawthorne division will perform better, helping push the SMG stock price higher again.

But there are two problems investors face while they wait for legalization to occur.

First is that SMG's management has reportedly been considering spinning off the Hawthorne business, and thus their whole marijuana industry connection. This would be force SMG investors to consider whether or not they owned SMG for the marijuana play. Analysts believe that the growth will largely come from the Hawthorne side of the business, and thus spinning it off would allow investors to reap the greatest benefits since it will no longer be ‘held back’ by the Scotts side of the business.

The second issue investors will be facing is simply time. The amount of time that they will have to wait for the new laws to be passed. Investors need to consider the opportunity cost of waiting a long time. In the past, in the US, the legalization cycle has taken a few years. We have a few new states all at once and then nothing for a few years. So, it may be a few more years before we see another big demand surge for Hawthorne’s products.

Some analysts will agree that SMG is a good buy with or without Hawthorne and that it is even worth holding, as long as Hawthorne is still a subsidiary, while you wait for new states to legalize marijuana. But that is a decision each investors needs to consider individually especially since SMG has shown us a very good example of a boom-and-bust business just over the past few years. This has been evident in the SMG stock price peaking at $244 per share back in March of 2021 and the stock now trading at just over $80.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Stay-At-Home Stocks Still Have Life

The Covid-19 pandemic has changed our world and lives in ways we never thought were possible before the global shutdown. One of the biggest changes was how we work and, more specifically, where we work.

I, for one, have worked from home for about a decade. At first, it was a big change that took some time to get used to, particularly the freedom of minimal oversight. But that can also be bad due to the self-control it takes to accomplish your work. Another challenge working from home is the self-imposed isolation or lack of in-person human interaction. While this isolation can help reduce distractions, it can also lower overall happiness and mental health.

At the beginning of the pandemic, nearly every friend I spoke to said they "loved" working from home - no more commute, no boss looking over their shoulder, and no more small talk with unlikeable co-workers. A few months in, more than half of the same people who said they loved working from home had started to say that they were "over it" and wanted to return to the office a few days a week.

Now, two years later, we are seeing a lot of different work arrangements. We have a group of people who have fully embraced the remote work life. Then there are the hybrid workers, in the office 2 or 3 days a week and work from home the rest. Finally, we have the office lovers ready and willing to be back full-time.

A January 2022 survey reported the preferences of people who can perform most of their job duties report. Of that group, 60% of people wanted to either work from home full-time or at least some of the time. 22% said they rarely or never wanted to work remotely. Furthermore, 64% said remote work made it easier to balance work and personal life, while 60% said they feel less connected to co-workers when they worked from remote offices. Continue reading "Stay-At-Home Stocks Still Have Life"

Tesla (TSLA) Gets Booted from the ESG Index

On May 2nd, the S&P 500 removed Tesla (TSLA) from its ESG Index, which is short for environmental, social, and governance. In recent years ESG investing has grown in popularity as more and more investors push for companies to treat the environment and their stakeholders to a higher standard. But, Tesla, a company that many people would point to as the poster child of an environmentally-friendly company, is no longer on the S&P 500's list of companies that are considered environmentally friendly.

If you are confused, you are not alone. Let's take a deeper look at this change and how it could affect your investments.

The idea behind ESG investing is that only companies promoting environmental sustainability, low carbon emissions, green energy initiatives, and good waste management would meet the environmental sustainability aspect of ESG investing. However, the S&P 500 said that Tesla's "lack of low-carbon strategy" and "codes of business conduct" heavily factored into the decision. The S&P said that Tesla's factories produced very high levels of pollutants. Tesla ranked 22nd on last year's Toxic 100 Air Polluters Index, a list compiled by U-Mass Amherst Political Economy Research Institute. For context, ExxonMobil ranked 26th on that same list last year. Continue reading "Tesla (TSLA) Gets Booted from the ESG Index"

EU Cuts Off Russian Oil Making These ETFs Top Buys

When the European Union voted to cut off Russian crude on May 31st, it was essentially a green light to buy oil stocks and, thus, a number of oil-focused ETFs. But before we dig into a few options that you should look at, let's talk about why this move is good for the oil industry and not necessarily your wallet.

The European Union voted to ban nearly all Russian oil from entering Europe. The details of the agreement essentially cut Russian oil imports into Europe by 90% over the next six months. The 27-country bloc relies on Russian oil for roughly 25% of what they consume. The ban directly applies to Russian oil that is delivered by sea, which means landlocked countries and Hungary, which receive the oil via pipelines, will still be permitted to access the commodity.

The goal of these sanctions is to cripple the Russian economy and force them to stop the war in Ukraine; however, Russia has already stated that they have other buyers of their oil in Asia, particularly China and India. Many believe Russia will be able to sell its oil to other countries but at a discount. Which will hurt Russia but may not have as much of an effect as the EU and other allied countries would like to see. Continue reading "EU Cuts Off Russian Oil Making These ETFs Top Buys"

Money Apparently Can Buy Happiness

A recently published paper by Matthew Killingsworth, a senior psychology fellow at The Wharton School of Business at the University of Pennsylvania, concludes that individuals with higher income often reported increased levels of day-to-day happiness and overall life fulfillment.

Previous research done at Princeton University found that happiness sort of plateaued once annual income reached around $75,000 per year. But Killingsworth believes that to be false and thinks the correlation between happiness and income can move higher in tandem indefinitely. He doesn't think that money and happiness are mutually exclusive. However, he does feel that people with higher incomes often feel they have more control over their lives.

The thinking is that the more money you make, the more choices you available to you during your everyday life. For example, it could be something as small as whether or not you buy organic food. Maybe a little bigger such as your range of 'affordable' cars becomes larger. Your living situation changes because you can afford a home or rent closer to where you work, thus reducing your commute. Killingsworth goes on to point out things like someone quitting a job or even ending a relationship, two things that may become 'easier' if your income is higher.

Obviously, not everyone that responded to the survey questions from Killingsworth reported higher happiness with higher incomes. Still, those who said financial security was important to them overwhelmingly showed a correlation to higher happiness with higher levels of income. However, Killingsworth also pointed out that some individuals with very low levels of income report high levels of happiness. He concludes that more money does buy happiness, but money is not the secret to happiness. Continue reading "Money Apparently Can Buy Happiness"