Investors looking for a play in the burgeoning legal U.S. marijuana industry are turning to a company known mainly for its lawn-care products.
After making big bets on pot, Scotts Miracle-Gro Co. has seen its shares soar 30 per cent to a record this year as polls indicate California, Massachusetts, Maine, Nevada and Arizona are poised to approve referendums dramatically expanding legal U.S. cannabis use. California alone could triple the nation's $6-billion (U.S.) legal marijuana industry if voters there approve recreational use next month, according to a Sept. 12 report from Cowen & Co.
"It is being looked at as a marijuana growth story," said Ivan Feinseth, a New York-based analyst with Tigress Financial Partners LLC, a banking and brokerage firm that rates the shares "buy."
Scotts has been on a buying frenzy in the past 18 months, gobbling up leading companies that provide specialty fertilizers, lighting and other supplies for hydroponics, the indoor method of growing crops favoured by U.S. cannabis cultivators. The company's hydroponics business now generates about $250-million of revenue a year. While the products are sold mostly through specialty shops, Scotts' Black Magic brand for indoor growing is available in 165 Home Depot stores.
"In states where the laws have evolved to allow the legal cultivation of cannabis, in almost every one of those states, that's happening using hydroponic growing methods," chief financial officer Thomas Randy Coleman said at a Sept. 13 conference. "We have the benefit of growing from that."
Scotts's hydroponics revenue represents less than 10 per cent of the $2.9-billion the company generated in the past 12 months. But while sales are relatively small, hydroponics products deliver higher margins for Marysville, Ohio-based Scotts, Mr. Feinseth said. And sales could take off are more states approve legal weed.
Scotts declined to comment on Tuesday.
Scotts hit a record high $86.08 (U.S.) on Wednesday. The stock's year-to-date rise compares with a 4.5-per-cent gain in the Standard and Poor's 500 index. The bulk of the increase has come in the second half as most polls show voters in those five states are favouring approval of ballot initiatives to allow recreational marijuana use by adults. Four other states, including Florida, will vote Nov. 8 on legalizing medical pot.
Adults living in states permitting recreational use would more than double to 23 per cent of the U.S. population if all five ballot questions pass next month, said Leslie Bocskor, a Las Vegas-based managing partner at Electrum Partners LLC, an industry adviser. Massachusetts and California represent the biggest growth, as well as Nevada and its 45 million annual tourists, he said. Almost $20-billion may be spent on infrastructure through 2020 to support demand from legalization, Ms. Bocskor said.
"Scotts is one of the only public companies you can play to actually participate in the growth of the industry," Ms. Bocskor said. "As people look and say, 'Hey I want to play the growth of cannabis industry in a public company,' there aren't a lot of choices, so Scotts probably will see substantial interest, especially after Nov. 8."
Not everyone is bullish on Scotts. As the shares have surged, so have bets that the stock will fall. Almost 5.7 per cent of the shares were being shorted in August, compared with 0.9 per cent in January. Short interest is currently 4.3 per cent. Short sellers unload borrowed shares, hoping to profit when they buy them back at a lower price.
Some companies still waiting to turn a profit serving the marijuana market also are performing well. Pot packaging maker Kush Bottles Inc. is up 63 per cent so far this year, cannabis researcher GW Pharmaceuticals PLC has gained 87 per cent and Terra Tech Corp., a penny stock, has quadrupled.
Recreational use is already allowed in Alaska, Colorado, Oregon, Washington and the District of Columbia, and it's medically permitted in 25 states, including California. Cowen expects the market to reach $50-billion by 2026 with federal legalization of the drug, a change more than half of Americans support.
Scotts's most recent acquisition, nutrient and supplements maker Botanicare, closed Oct. 1. The company's first major foray into the marijuana business came last year when it bought nutrients maker General Hydroponics. Sales there have doubled expectations, chief executive officer James Hagedorn said during the company's third-quarter earnings call in August. Scotts paid $136-million for a 75-per-cent stake in Gavita, a producer of high-end lighting systems.
That company "can't make things fast enough," Mr. Hagedorn said.