They may call it “weed,” but commercial legal cannabis – the “good stuff” – is more like a pampered, pedigreed dog.
Every pot grower knows that lots of care, technique, and technology goes into the cultivation and feeding of marijuana plants. All that’s needed so those plants can flower and produce commercially and medically useful compounds – especially the psychoactive tetrahydrocannabinol-9 (THC) that relieves pain and nausea and gets recreational users high.
This is seriously labor- and tech-intensive stuff. It’s also the specialty of the company I’m going to show you today.
This company is one of the fundamental picks in my Nova-X Report’s Roadmap to Marijuana Millions model portfolio.
The Pros Can’t Afford a Spoiled Harvest
Marijuana plants must be exposed to light for 12 hours a day – and be kept in darkness for just as long.
Kayvan Khalatbari and Nick Hice, co-owners of medicinal-marijuana dispensary Denver Relief, told The Denver Post that “the best place to grow marijuana is in a room in the basement with a locked door so light doesn’t inadvertently get in when the plants are ‘sleeping.'”
That’s fine for folks who grow their own at home. If you spoil a “harvest” or two, you won’t go broke or out of business.
Not so for professional, large-scale cultivators. They have little room for error. As they say in the trade, the “plants have to flower.”
To protect their investment, growers turn to state-of-the-art greenhouses containing high-tech devices and monitors such as hygrometers, which see to it that humidity levels never get above 50%, and CO2 tanks, which add the carbon dioxide that plants breathe to indoor air.
Another way that major growers control cultivation is through “hydroponics,” which is a method of growing plants in mineral- and nutrient-laced water, without soil. According to Manifest Minds LLC, hydroponically grown legal cannabis plants will make up a $24 billion market by 2018.
All this barely scratches the surface of marijuana technology. Growers also need high-powered horticultural lightbulbs, custom regulated fans, valves and pumps, nutrient and mineral supplements, and specialized “grow tents.”
With growers so dependent on technology to operate the soon-to-be $200 billion legal marijuana industry, it’s no surprise that Silicon Valley is pouring money into it. According to Cleantech Group, venture capitalists sink close to $1 billion into agriculture startups every year.
A 2015 report by MarketsandMarkets estimates that the market for “smart” greenhouses will reach $1.2 billion by 2020.
However, that $1.2 billion target is a tiny fraction of the potential profits to be had from this niche.
That’s why I’m setting us up for maximum upside (and absolute minimum downside risk) from this trend…
Home Growers Love This Company, Too
While the legalization of marijuana is creating the need for acres and acres of professionally grown cannabis, you shouldn’t forget the little guy.
After all, for decades thousands of consumers have been growing their own, even while risking trouble with law enforcement. By one estimate, $60 billion worth of illegal pot is grown each year in the United States.
However, with marijuana now legal in 29 states and counting, the number of people looking to cultivate it for their own consumption is likely to skyrocket.
The marijuana-growing market could easily top $100 billion within five years, with much of that supply displacing imported marijuana from dangerous jungles in Latin America.
And while this opens up an opportunity for firms that cater to growers and gardeners, it also presents those firms with a strategic dilemma. Should they establish a strong early presence in the pot-growing community? Or wait until the social climate around cannabis normalizes – that is, until growing your own pot is no more controversial than brewing your own beer?
Scotts Miracle-Gro Co. (NYSE: SMG) is going with the first option: Embrace this fast-growing community of growers and, by doing so, “plant the seeds” for robust new paths to growth.
I think this is absolutely the right way to go. Scotts is going to leave the “wait and see” crowd in the dust.
Scotts, already the world’s largest maker of lawn care and gardening products, is now making a big push into indoor plant cultivation, as evidenced by its April 2015 purchase of General Hydroponics.
As I said, “hydroponic” gardeners use air, light, and water to grow their plants indoors – without the need for soil.
This method means no mess and, more importantly, no pesticides. That’s a key consideration for green consumers.
Now, given the admittedly unsettled legal landscape around cannabis, Scotts’ emphasis on that market might seem like a dangerous choice.
But in truth, it’s less risky than it seems…
A Smart Play – Legal Cannabis or Not
If the legal marijuana movement stalls, Scotts will still benefit from the growing demand for hydroponic equipment among young urban consumers eager to grow the herbs and greens that go into their salads.
But it’s hard to imagine the push for legal marijuana stalling out. In many respects, that genie has left the bottle.
Even before legal pot made this new growth potential possible, hydroponics had been very popular with a whole array of growers.
According to Manifest Minds, the global crop value of hydroponically grown plants is on pace to rise from $17 billion in 2013 to $24 billion by 2018.
Plus, as countries like Canada and Australia follow the lead set by the United States, pot cultivation – and hydroponics – will soar much higher than that.
There are many reasons why Scotts Miracle-Gro should embrace hydroponics.
First, populations are increasingly concentrated in cities and even mega-cities. As people trade the countryside for the cityscape, they’ll have to grow their herbs and vegetables indoors, using hydroponics.
Then there’s the perennial concern over pesticides, many of which are banned. Hydroponics needs no pesticides because, as we said, it uses no soil.
On an even bigger scale, water shortages are a growing problem around the world and make crop growing harder. Hydroponics uses controlled “drip” irrigation, which drastically reduces the amount of water needed to grow plants.
In other words, Scotts bought into the hydroponics field because it’s a very attractive business. Plus, it has much higher profit margins than traditional lawn and garden supplies.
Finally, there’s the happy fact that demand for hydroponics systems stays strong year-round. Scotts CEO Jim Hagedorn isn’t just dipping his toe in the water here. He sees the purchase of General Hydroponics as just the first of several moves, all aimed toward the goal of creating a $1 billion yearly business.
That’s a nice bolt-on addition for a business that generated around $2.8 billion in sales last year. Hagedorn is a big believer in market share, and he likely looks at the emerging hydroponics and cannabis markets the same way. Scotts’ four leading brands (Scotts, Miracle-Gro, Round-Up, and Ortho) have a commanding position, with market shares ranging from 53% to 70%.
And the firm is out to make it easy for people to start using hydroponics equipment to grow either cannabis or food. Scotts Miracle-Gro has 2,500 sales associates that it sends to visit retail stores after training them on the merits of hydroponics.
Way More Than a “Pot Stock”
Make no mistake: This is not your typical cannabis investment. For one thing, Scotts is already quite popular with mutual fund managers, who like the fact that the firm has boosted its dividend for seven straight years.
Building a well-rounded cannabis portfolio is absolutely essential for unlocking massive profit potential with balanced risk.
Scotts is the clear choice to anchor the low-risk end of your cannabis portfolio. And its early move to embrace the cannabis community will boost its share price as more and more states and nations legalize marijuana.
Now Scotts Miracle-Gro is just one of the high-profit-potential pot stock picks in my new, updated Roadmap to Marijuana Millions – Phase II.
It’s the latest edition of my “weed investors’ bible,” looking ahead at the very best legal weed investment ideas in 2018. All my Nova-X Report members get a copy.
Have a great week.
See you back here soon.