Everything Costs More These Days, Except For?

Key Takeaways:

• Despite record inflation, weed costs much less than it did a year ago in the US and Canada. 
• There’s a ton of supply and relatively weak demand for weed. 
• Investors might want to consider a beaten down stock with one foot in the cannabis industry. 

Now, some numbers that might make you smile. Or even giggle. 

Source: Headset

In the US and Canada, the cost of “flower” (aka, weed) continues to drop in price, bucking the inflationary trend. 

In the States, you’ll pay an average of $5.28 for a gram of weed. That’s more than $1.50 less expensive year-over-year. 

The data from Canada, just as dramatic. 

Source: The Globe and Mail

Here’s Why We’re Seeing These Numbers

It’s pretty simple. 

During the stay-at-home portion of the pandemic, marijuana use increased significantly. Makes sense. What else did you have to do other than Netflix and chill? 

Now, you’ve unsubscribed from Netflix and you’re not smoking as much weed. But during this surge in demand, suppliers flooded the market with flower. So this mix of factors has brought the price of weed down at the wholesale and retail levels. 

If You’re Looking For A Cannabis Play

We have what might be one of the biggest bargains in the stock market today. 

Long before everything started going down, investors were already trashing Scotts Miracle-Gro (SMG). 

Source: Google Finance

Even amid 2022’s carnage, that’s ugly. 

So what’s up? 

A couple of things. 

One, as the stay-at-home portion of the pandemic eased, so did hobbies such as gardening (and weed smoking!). Heading into May, retail lawn and garden sales were down 12% annually at Scotts’ top four US retailers. Scotts derives roughly half of its revenue via this segment. 

Weather is one reason to blame for this slowdown. As spring sprang late this year, Scotts is just now seeing sales tick up in the South. The company also expects Memorial Day and summer promotions to help. Despite this, the company still expects consumer sales to come in on the low-end of its previous guidance. 

Two, the cannabis business. Scotts sells hydroponic gardening supplies to the cannabis industry through its Hawthorne Gardening Company subsidiary. The same growers hit by depressed weed prices. At the same time, cannabis legislation at the state and federal level continues to move forward at a slow pace. 

Scotts also invests in cannabis startups in the US and Canada via its Hawthorne Collective subsidiary. 

Once Weed Is Legal Everywhere

The writing’s on the wall. 

With New Jersey legalizing recreational marijuana in April, states continue to fall like dominoes. At the moment, 37 states have legalized medical use and 18 states permit recreational use. More states, including Rhode Island, appear set to follow. At the same time, the federal government appears poised to decriminalize cannabis, opening the door for more states to make legalization the norm. 

Against this backdrop and the aforementioned price decreases, the recreational cannabis market is still on track to expand to $25 billion by 2025 from approximately $15 billion last year. 

The Bottom Line: Scotts will benefit from increasing federal and state acceptance of marijuana. As long as the long-term narrative remains intact – and it appears to be – short-term headwinds present little more than buying opportunities for long-term investors.  

Off roughly 59% from its 52-week high, Scotts now trades at just 14.5x earnings. Its depressed stock price has increased its dividend yield to nearly 2.6%. Speaking of that dividend, the company recently approved a $0.66 quarterly payment. Scotts has increased its dividend for 12 straight years, growing it at a 5-year clip of 5.7%. 

With Scotts, you’re buying a stock that’s oversold from technical and story standpoints. You get a player in the cannabis industry, as a key part of the supply chain and an investor in emerging companies. At the same time, consider Scotts’ consumer products division a well-established hedge as we wait for cannabis to become fully mainstream, like alcohol, in the US and Canada.

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