Better Marijuana Stock: Canopy Growth Corporation vs. Scotts Miracle-Gro

A grand total of two marijuana stocks trade on the New York Stock Exchange (NYSE). Canadian marijuana grower Canopy Growth Corporation (NYSE: CGC) is one. The stock was listed on the NYSE in May. The other is Scotts Miracle-Gro (NYSE: SMG), which has traded on the NYSE since 1992.

In a sense, Canopy Growth and Scotts Miracle-Gro are about as blue chip as you can get for marijuana stocks. But which of these stocks is the better buy for investors? Here’s how Canopy and Scotts compare.

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The case for Canopy Growth

You might think that the best argument for buying Canopy Growth stock is that Canada will soon allow legalized recreational marijuana throughout the country. And that is certainly one reason to like Canopy’s prospects.

The company ranks as the largest marijuana grower in Canada and stands poised to hit the ground running when recreational marijuana officially becomes legal in October 2018. Canopy Growth already has significant production capacity and is adding even more. The company also has supply agreements with three Canadian provinces for recreational cannabis and will no doubt line up additional provinces and territories over the next few months.

But is Canopy’s opportunity in the Canadian marijuana market the best reason to buy the stock? Nope. The Canadian recreational cannabis market is expected to generate total revenue of at least CA$5 billion and perhaps significantly more. Canopy is likely to claim a nice chunk of that market. However, the strongest argument for buying the stock isn’t in Canada — it’s in Canopy’s opportunity in the rest of the world.

Currently, 22 countries outside of Canada have legalized medical marijuana. The potential size of this market is close to eight times larger than Canada’s total marijuana market. In addition, there are at least 14 other countries that could potentially legalize medical marijuana within the next few years.

Canopy Growth already has established international operations throughout the world. It has a subsidiary ready to capitalize on the fast-growing medical cannabis market in Germany as well as other European opportunities. Canopy is well positioned in South America with subsidiaries in Brazil and Chile. The company owns part of an Australian medical cannabis distributor. Most recently, Canopy acquired a company in Lesotho, a deal that should give it an advantage if South Africa legalizes medical marijuana.

The bottom line is that Canopy should be able to increase sales by leaps and bounds over the next several years as it meets demand both at home and across the world. Although the stock price already reflects tremendous anticipated growth, Canopy could still have plenty of room to run as global markets open up.

The case for Scotts Miracle-Gro

Scotts Miracle-Gro doesn’t grow marijuana — but its products help others do so. The company traces its roots all the way back to 1868. Scotts has been and continues to be one of the top providers of lawn and garden products.

The company’s Hawthorn Gardening subsidiary completed several acquisitions over the last few years to become the leading supplier of hydroponics products to the cannabis industry. Perhaps the most important of these deals was announced in April with Scotts’ planned buyout of Sunlight Supply for $450 million.

Expanding into the cannabis market is a key part of Scotts Miracle-Gro’s growth strategy, but that strategy hasn’t panned out so well in 2018. The reason, though, stems primarily from a slower-than-expected pace of finalization of regulatory processes in California, which opened its legal recreational marijuana market this year.

California’s regulatory kinks should be worked out relatively soon, however. And Scotts should benefit as more states legalize recreational and medical marijuana. But the biggest opportunity for Scotts could be the potential for U.S. laws to be changed so that states that have legalized marijuana won’t face the risk of federal intervention. The removal of this risk could open up the pathway for even more states to legalize marijuana, which would likely create more prospective customers for Scotts.

While marijuana is certainly important for Scotts Miracle-Gro, the company’s primary focus is still in the consumer lawn and garden business. Scotts makes more than 90% of its total revenue from selling lawn and garden products. This segment of its business has gotten a slow start in 2018 due to a longer period of cold weather. Over the long run, though, Scotts should enjoy solid growth for its lawn and garden products.

Scotts also claims one other thing that investors will like: a dividend. The dividend currently yields nearly 2.5%, enough to add nicely to the stock’s total return over the long run.

Better buy

I’m going to split hairs a bit with the decision between Canopy Growth and Scotts Miracle-Gro. If you’re a more conservative investor, Scotts is the better pick. The company already generates a nice cash flow. Its dividend is great. Scotts has a solid consumer lawn and garden business and is poised to benefit from growth in the cannabis industry.

On the other hand, if you’re the more adventurous type of investor, you might like Canopy Growth. Marijuana markets are kind of like the Wild West — plenty of action and lots of uncertainty. But Canopy is in better shape than probably every other marijuana grower to enjoy success if the global marijuana market takes off like many expect.

Both Canopy Growth and Scotts Miracle-Gro face risks. However, those risks appear to be getting smaller as marijuana use gains acceptance across the world.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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