We recently compiled a list of the 8 Best Pot Stocks to Buy. In this article, we are going to take a look at where The Scotts Miracle-Gro Company (NYSE:SMG) stands against the other pot stocks.
The history of the cannabis industry is riddled with changes and conflicting legislation. The international media has played an important role in shifting perspectives about marijuana and drug use. Today, we are watching the slow and steady change of mainstream opinion to consider cannabis one of the more harmless – and probably even potentially beneficial – drugs still considered largely illegal. As perspectives change, we can expect the laws to eventually follow suit.
Global Cannabis Industry:
As we mentioned in our article – 20 Cities with the Most Expensive Weed in the World – the global cannabis market was valued at $47.32 billion in 2022, and is projected to grow from $57.18 billion in 2023 to $444.34 billion by 2030, growing at a CAGR of 34% during the forecast period.
Marijuana legalization is gaining momentum around the globe, driven primarily by the increasing recognition that the product may have a range of legitimate medicinal benefits and therapeutic applications. It is the most widely cultivated, trafficked, and consumed drug worldwide.
Easing Federal Restrictions:
It was announced on the 16th of May that the US Justice Department has officially proposed a new rule that would reclassify marijuana from a ‘Schedule I’ drug, which includes heroin and LSD, to a less tightly regulated ‘Schedule III’ drug, which includes ketamine and some anabolic steroids. The decision marks a major policy shift by the federal government and while it would neither make the substance legal nor decriminalize it on a federal level, it would recognize the medical uses of cannabis and acknowledge that it has less potential for abuse than the many more harmful drugs. The change would also open more doors to conduct research on marijuana.
Another significant benefit of the reclassification is that it could add fresh arguments for supporters of ballot measures seeking to legalize cannabis in states where it is still illegal. An example of this is Florida, where voters will decide on a constitutional amendment allowing recreational weed this November.
But perhaps the ones benefiting the most from this change are cannabis companies, which after the rescheduling would no longer have to follow tax provisions under a rule called 280E, which prevents them from taking standard business tax deductions.
Although the rescheduling is far from the federal legalization that the cannabis industry is so desperately waiting for, it is a step in the right direction. As a result, several marijuana stocks and pot ETFs posted solid gains following the announcement.
Methodology:
To collect data for this article, we scanned Insider Monkey’s database of 920 hedge funds and picked the top 8 companies operating in the cannabis industry with the highest number of hedge fund investors. When two companies had the same number of hedge funds investing in them, we ranked them by the revenue of their last financial year instead.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A farmer standing in a lush field of vegetables that has been enhanced by the company’s hydroponic products.
The Scotts Miracle-Gro Company (NYSE:SMG)
Number of Hedge Fund Holders: 29
The Scotts Miracle-Gro Company (NYSE:SMG) manufactures and sells consumer lawn, garden, and pest control products, as well as soilless indoor gardening equipment. The Ohio-based company has applied its expertise in horticulture and gardening to develop innovative technologies and solutions specifically tailored for cannabis cultivation. SMG reported revenue of over $1.52 billion in Q2 of 2024 ending March 31st, 2024, a slight decrease from the $1.53 billion reported in the same quarter last year. However, net profit soared by an impressive 44%, from $109.4 million to $157.5 million, due to the decrease in costs.
Jim Hagedorn, CEO of The Scotts Miracle-Gro Company (NYSE:SMG) stated in the company’s Q2 earnings call transcript:
“Everything we’ve done to get to a better place is happening, just like we projected it would when we laid out our fiscal ‘24 guidance. We told you we would achieve high single-digit growth in the consumer business and $575 million in adjusted EBITDA this year. And we’d do so while generating $1 billion in free cash flow over two years by the close of fiscal ‘24, improving gross margin by at least 250 basis points, and finding a long-term solution for Hawthorne. Free cash flow is a fabulous story. It improved over $500 million from prior year, exceeding our first half target by $200 million. Our debt levels are down by more than $750 million year-over-year. The most telling sign we’re in a better place is our leverage improvement. For Q2, we finished at 6.95x EBITDA, well within our covenant max of 7.7x, and better than Q1.”
The Hawthorne Gardening Company, SMG’s struggling subsidiary for cannabis growers, reported 28% lower net sales compared to the year before, mainly driven by lower volumes and price reductions. Hawthorne is moving away from distributed products to cut costs, shutting down 13 of its distribution centers in the last two years, and is now focused on its more profitable, exclusive, and owned brands like Gavita, Botanicare, General Hydroponics, Psycho, Mother Earth, and HydroLogic. The subsidiary’s recently announced distribution partnership with BFG is also expected to lower cost structure throughout the year.
29 hedge funds in the Insider Monkey database were bullish on SMG in Q1 of 2024, with a collective stake value of $422.7 million.
Overall SMG ranks 2nd on our list of the best pot stocks to buy. You can visit 8 Best Pot Stocks to Buy to see the other pot stocks that are on hedge funds’ radar. While we acknowledge the potential of SMG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SMG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
