Across North America, there seems to be a steady march towards decriminalising the possession and sale of marijuana. Many US states have legalised recreational cannabis use, including the most populous state, California, back in 2016. In Canada, recreational cannabis has been legal since 2018, while Mexico allows cultivation for personal use.

I think there’s been a cultural shift where using cannabis is now as socially permissible as tobacco.  Tobacco companies including Imperial Brands and British American Tobacco are some of the highest performing dividend stocks available. Cannabis stocks could soon be just as profitable.

Miracle cannabis stock?

Scotts Miracle-Gro (NYSE: SMG) used to only sell generic gardening equipment. Now, thanks to its subsidiary, Hawthorne Gardening Company, it offers everything that cannabis growers need to farm their product. This includes grow lights, fertiliser, and hydroponic nutrient solutions. 

Revenue was $4.1bn for FY2020, which was up by 31% year-over-year. Hawthorne generated $1.1bn of these sales, representing a 61% increase year-over-year. 

By Q3 2021, the company brought in $1.6bn in revenue, an 8% rise year-over -year. Moreover, the Hawthorne division saw revenue surge 48% from $285.7m to $421.9m. As more states loosen their cannabis laws, there’ll be an increasingly large market to capture. And as a industry supplier, it doesn’t have the same risks of dealing with changing tastes or crop failures.

Acquisitions and growth

The company has been on an investing splurge. Last week, Hawthorne invested $150m into Canadian RIV Capital, which is planning to move into the US market this year. Yesterday, the company announced it has invested $3.2 million into Dewey Scientific, an agricultural technology company that specialises in improving the genetic diversity of cannabis crops.

It’s also spending another $65m acquiring HydroLogic Purification Systems, which sells water filtration and purification solutions to corporate cannabis growers.

After releasing Q3 2021 results, CEO James Hagedorn said that “this industry is poised for significant growth. And given our track record, I believe we have an absolute right to win here.” He expects revenue growth of between 17% and 19% for FY 2021, with Hawthorne’s sales rising between 40% and 45%.

Potential side-effects

The day Q3 2021 results were released, SMG stock tumbled by 6.7%. The share price has been falling consistently since April, and could fall further before stabilising.

There’s also the risk that future state legislatures might roll back decriminalisation. Some banks and venture capital funds refuse to lend to cannabis companies because of this future legal uncertainty. Cannabis companies often get around this by creating more shares to raise capital. This results in share dilution, which reduces the value of pre-existing shares. This is exactly what happened with competitor Sundial Growers. Its share price rallied to $252 in April, spurred on by Reddit investors. It has since fallen to a more realistic price of $150.

With a price-to-earnings (P/E) ratio of only 15, Scott Miracle-Gro is still the cannabis stock I’d buy for my portfolio.

When most investors think about marijuana stocks, one like Canopy Growth Corporation(NYSE:CGC) probably comes to mind. The company cultivates and produces cannabis products, including flower and oils. But while The Scotts Miracle-Gro Company (NYSE:SMG)is still best known for its consumer lawn and garden products, it too has become a marijuana stock by emerging as the leading supplier to the U.S. cannabis industry.

There’s no contest between these two stocks when it comes to year-to-date performance. Canopy Growth is up close to 80%. Scotts is down more than 25%. But which of these stocks is the better choice for long-term investors?

IMAGE SOURCE: GETTY IMAGES.

The case for Canopy Growth

Any argument about the merits of investing in Canopy Growth has to start with the tremendous growth opportunity for the global cannabis industry. Countries around the world have legalized medical marijuana. Canada and Uruguay have legalized recreational marijuana, along with 10 U.S. states plus the District of Columbia. Some project that the global marijuana market will top $100 billion and perhaps a lot more within the next 15 years.

Canopy Growth appears to be in the best position of any company to capitalize on this market. It currently has 4.3 million square feet of licensed growing space in Canada. With its subsidiaries, Canopy claims a whopping 5.6 million square feet of growing space.

Production capacity is one key to success for Canopy Growth. Its distribution channels are another. Canopy lined up supply agreements for the recreational marijuana market in all of Canada’s provinces and territories that have announced supply plans. The company is moving forward aggressively with its retail strategy as well.

Earlier this year, major alcoholic-beverage company Constellation Brands invested $4 billion in Canopy Growth, boosting its stake in Canopy to 38% with an option to acquire even more shares. This deal solidified Canopy Growth’s status as the leading player in the cannabis industry and gave the company a big cash stockpile to expand its operations. Constellation Brands and Canopy Growth plan to launch cannabis-infused beverages in Canada when regulations are finalized for these types of products. 

Canopy Growth already has a presence in multiple international medical marijuana markets, including Australia, South America, Africa, and Europe, particularly in Germany. The company is poised to enter any other countries with federal laws that allow the legal sales of marijuana.   

The case for Scotts Miracle-Gro

Growth for the global cannabis industry is also a key part of the investing thesis for Scotts Miracle-Gro. But the focus for Scotts is on the U.S. market.

That’s actually a big plus for Scotts. The U.S. currently generates roughly 85% of total legal marijuana sales worldwide. That percentage will decline somewhat over the next few years as the markets in other countries expand. But the U.S. will continue to be the big prize for marijuana businesses for a long time to come.

Thanks to a string of acquisitions, Scotts Miracle-Gro has become the go-to supplier for U.S. marijuana growers. The company’s Hawthorne Gardening subsidiary provides a wide range of products, including fertilizers, hydroponics, lighting systems, irrigation systems, and ventilation systems.

Hawthorne Gardening makes the lion’s share of its money now in California. That’s not surprising, since it’s the largest marijuana market in the U.S. by far. However, the company has tremendous growth potential in other states — especially those that legalize recreational marijuana.

Still, Scotts Miracle-Gro’s marijuana-focused business generates only around 8% of the company’s total revenue. The rest comes from its core lawn and garden business. Scotts is launching new products and raise prices in 2019, moves that should boost its revenue. And with warmer weather conditions likely in future years, the company’s lawn and garden sales could enjoy solid growth.

There’s one more reason for investors to like Scotts Miracle-Gro as well — its dividend. Scotts’ dividend currently yields 3.11%, a nice bonus on top of the company’s growth prospects.

Better buy

If you’re a more conservative investor, Scotts Miracle-Gro is probably the better pick for you. The company generates a steady cash flow, it’s profitable, and it pays out a solid dividend. 

On the other hand, more aggressive growth investors will probably like Canopy Growth. If the global marijuana market gets anywhere close to the levels many expect, Canopy will skyrocket. The major downside for Canopy Growth is that its valuation already assumes a lot of growth. Should anything arise that derails the company’s growth trajectory, its stock would almost certainly plunge.

But trading off risk for reward comes with the territory for investors. For those who don’t want to take on as much risk, go with Scotts Miracle-Gro. For investors comfortable with higher levels of risk, consider Canopy Growth. Both marijuana stocks should be winners over the long run.