Marijuana stocks are all the rage these days after the Democrats secured unified control of the White House and Congress. Investors are betting that the new administration will be more favorable to the concerns of the cannabis industry, and that’s why you see astronomical numbers for several companies in the space.
However, certain investors remain skeptical since there is a sense of déjà vu. When Canada legalized marijuana a few years back, there was similar excitement in the sector.
Heralded as a game-changer, it led to overstretched valuations, and when the bubble burst there were several investors left in the dust. Canada’s cannabis market was found wanting, with regulatory hurdles and a stubborn black market serving as its biggest adversaries.
But the current rally is different. It’s not based on enthusiasm surrounding the Canadian market. To put things in perspective, Canada’s cannabis market is projected to be valued at $4.3 billion by 2025. In 2019, California alone accounted for $3 billion of legal marijuana sales.
Hence, the enthusiasm is not misplaced. However, if you are still skeptical of investing in the space, then this is the list for you. It will tell you about three companies that will allow you to invest in the legal cannabis industry but offer other products and services.
That way, the stress of investing in a pureplay disappears. So, without further ado, here are our three picks:
Marijuana Stocks: ScottsMiracle-Gro (SMG)
SMG does not feature on several lists of must-have marijuana stocks. That’s because its main source of revenue is gardening and lawn care products. However, it also supplies cannabis-growing equipment through its Hawthorne segment.
Business is booming, and the fiscal first-quarter results delivered another earnings beat. Revenues came in at $748.6 million, up 105% from $365.8 million and a beat of $124.62 million, according to data from Seeking Alpha. Non-GAAP adjusted earnings of $0.39 per diluted share also beat expectations by $1.06 per share.
The Hawthorne segment saw revenues increase by 71% to $309.4 million, and the U.S. Consumer segment sales grew 147% to $408.2 million. Looking ahead, it upped its full-year sales growth outlook for Hawthorne to a range of 20% to 30% from previous guidance of 15% to 20%. That is excellent news for investors that are looking to play this company for its cannabis prospects.
Refinitiv has a 12-month price target of $273 per share from four analysts tracked, implying a 23.9% upside. Shares are down 4.6% in the last month, so they are trading at a very attractive valuation right now for you to pick up.
Another company you might not have expected to see on this list is MSFT. Pretty much everyone in the world knows that it for producing cutting-edge computer hardware and software. However, it’s interesting to note that the company has been in the cannabis business for a while now.
In 2016, Microsoft entered a partnership with KIND Financial to provide seed-to-sale software technology so that local authorities can keep track of the legal cannabis business. A huge development for the cannabis space, considering the dominance of MSFT in the tech world.
However, like the other constituents on this list, Microsoft is a diversified enterprise with a finger in every pie. Due to its ubiquitous nature, the company is one of the most consistent performers out there. According to Stock Rover data, the company has reported 11 positive earnings surprises in the last 12 quarters, astounding for such a mature company.
Refinitiv tracks 31 analysts offering price targets on MSFT. The average 12-month price target for shares is $273 a pop, a 16.4% upside to the current stock price.
I don’t believe any analyst or investor needs to talk about the benefits of pouring your capital into MSFT stock. However, the company’s investment in the cannabis space is another reason why you should do so.
Constellation Brands (STZ)
If you are a fan of wine and spirits, then the next entrant on this list might seem familiar. Constellation Brands is a multi-category supplier of alcoholic beverages across several countries.
Some of its major brands include Corona Extra, Corona Light, and Modelo Especial. Among its several investments is Canopy (NASDAQ:CGC), a Canadian cannabis company listed on the Nasdaq.
The relationship between Constellation Brands and Canopy is symbiotic. Constellation considered the investment a strategic one, through which it gets a foothold in Canada’s cannabis market. Meanwhile, Canopy gets strong institutional support from one of the largest beverage companies in the world.
Constellation is also a very consistent performer, much like MSFT, outpacing Wall Street estimates in 11 out of the last 12 quarters. The company recently reported an EPS of $3.09, a beat of 28.2% over the estimates of $2.41 per share, according to Stock Rover.
Looking ahead, Refinitiv has a 12-month price target of $252 per share, a 15.6% upside from the current price.
It’s worth noting that Constellation has benefitted from the pandemic. With millions of Americans under instructions to stay at home, sales for both Canopy products and the broader Constellation brand have remained strong.
However, with vaccines rolling out, sales could slow, a minor interim problem you need to be aware of. Regardless, it’s still safer investing in this one rather than pure-play marijuana stocks.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.