The marijuana industry in the U.S. is huge and growing at an exponential rate, but between regulations and legal uncertainty, the industry is incredibly risky for businesses and investors. Luckily for investors, you don't need to invest in a volatile penny stock to have exposure to the industry.
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In this clip from Industry Focus: Healthcare, host Kristine Harjes and contributor Todd Campbell explain how lawncare company Scotts Miracle-Gro (NYSE: SMG) is getting exposure to the huge upside of marijuana without risking its whole livelihood on legislative calls that are still up in the air.
A full transcript follows the video.
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This video was recorded on Aug. 9, 2017.
Kristine Harjes: What we want to pitch to you guys today is the picks and shovels play here. It's a safer way to get some exposure to this industry by exposing yourself to a company that has a hand in the actual growing process itself. Todd, do you want to unveil what our company is?
Todd Campbell: I mentioned at the beginning of the show that I was doing a lot of gardening this weekend, and I'd be lying if I didn't tell people exactly the products I was using. I was using products made by Scotts Miracle-Gro. They market brands like Miracle-Gro, the Scotts grass seeds, Ortho, which is used to deter pests, and they also market Roundup, which is the weed killer. And sure, all of those products are well-known to consumers who walk through the aisles of their local garden shop or home improvement center, but what they may not realize as they're using those products is Scotts Miracle-Gro is also the manufacturer of a very fast-growing suite of products that are used in hydroponic growing. And hydroponics is a big, big market in marijuana.
Harjes: Right. Hydroponics means growing plants without soil. This is huge, particularly for medical marijuana. While the company hasn't even identified marijuana as an opportunity for it yet, this wholly owned subsidiary called Hawthorne Gardening Company, which is focused on hydroponics, makes up about 10% of the company's total sales, and it's growing astronomically.
Campbell: We've got that segment growing at double digits, 20% organic growth last quarter year-over-year. And that's just organic growth. Scotts has been extremely active in acquiring companies in this space. As a result, they now have all sorts of soup to nuts offerings across hydroponic gardening. Obviously, you can use hydroponics for other things other than growing marijuana, you can grow anything. Hydroponics, typically, when you use that technology, you can grow things 25-50% faster than you would in typical soils. So, you have the company now owning brands like Botanicare, that's an Arizona-based producer of plant nutrients in supplements that are used in hydroponic gardening. You've also got them owning a big stake of Gavita, which is a big maker of the indoor lighting systems and such that are used for growing different plants.
Harjes: What I really like about this company as a way to play on the marijuana industry is, as we mentioned, there's this safety net. Even if the marijuana industry were to completely fall apart -- which, I don't think that's going to happen -- you still have 90% of the business firmly based in an established lawn and garden care company. This is a $6 billion company. They have over a 2% dividend yield, they're consistently profitable. They are a far extreme from a lot of the marijuana penny stocks you see out there.
Campbell: Yeah. Their other business is a slow-growing, low single-digit business. But it's a steady eddy business that kicks off substantial cash flow that they can then use for buybacks and those dividend increases that income investors tend to love. Then, you've got this kicker in the hydroponics business, where you've got operating margins in that business of about over 20%, you've got sales in an increasingly larger percentage of the total haul taken in by Scotts Miracle-Gro. I wouldn't be surprised if it were approaching 20% of revenue over the course of the next year or two, just based on their acquisition activity. And, this business is growing pretty rapidly. There's a lot of demand as legalization occurs in these different states. And theoretically, since we're in the early innings, you have a long runway of that growth, which is also important. Who knows, maybe even down the line they even spin this company off to investors once it reaches a certain level of sales and profitability.
Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.