Seeing Green in The Marijuana Boom With A Fertilizer Stock

Nearly every day, I get a call from a client wanting to know how to invest in the marijuana industry. These inquiries come from across the country and represent every demographic group, including Baby Boomers, whom most would consider conservative, not only in their investment outlook but the manner in which they view social issues. The uptick in interest is hardly a surprise, reflecting a dramatic shift in public opinion, which not long ago viewed cannabis advocates with a mix of derision and contempt.

Marijuana is now legal for recreational use in eight states, while 28 states, plus Washington, D.C., allow it for medicinal purposes, and according to a recent poll, 61 percent of Americans favor legalized marijuana, a 21-point jump since 2010. These trends have everyone from entrepreneurs, to state legislators, to even some governors dreaming of the possibilities, whether it’s opening a pot shop or finding a creative way to fill in a budget gap.

To better appreciate the potential opportunity, consider what happened through just the first four months of this year in Colorado, which decriminalized marijuana in 2014. Dispensaries in the state have generated over in $500 million in sales, producing more than $76 million in tax revenue. Similar numbers have trickled out of Washington, Oregon and the handful of other states that have embraced recreational use, and they all tell very much the same story: Marijuana is a money maker.

Still, finding a good way to invest in it remains problematic. The industry is simply too young, too fraught with risk and has too many unknowns hovering over it.
Some have suggested pharmaceutical companies, including GW Pharmaceuticals and Insys Therapeutics, both of which are said to be close to unveiling THC-based drugs to help treat, among other things, stress, nausea and complications from AIDS. But as cynical as this sounds, medicines that alleviate pain aren’t nearly as profitable as the ones that cure terminal illnesses or tackle potential deadly side effects from other serious ailments. What’s more, with medicinal marijuana now a reality in over half the states, the upside for companies bringing marijuana-related drugs to market is limited.

Another much talked about option is Innovative Industrial Properties, a real estate investment trust (REIT) that invests in warehouse properties and leases out the space to medicinal marijuana growers at a premium. Because of the elevated risk factors, the returns have the potential to be much higher than a typical REIT. But such factors also mean that IIP could go bust at virtually anytime, since the Justice Department, which has floated the idea of moving forcefully against marijuana, could shut down their business.

Of course, there are other routes to go, including the OTC market or Canada, that provide exposure to various vape companies and dispensaries. But most of these businesses are small, unproven and shrouded in mystery, a combination that should give every investor serious pause.

In our view, the only sensible way to play the burgeoning marijuana industry is via Scotts Miracle Gro, which has gobbled up a host of companies in recent years that produce lighting, specialty fertilizer and other hydroponic equipment used by marijuana growers. While this segment of the company, dubbed Hawthorne Hydroponics Brands, represents only a small slice of SMG’s overall sales, the division is easily its fastest-growing, far outpacing its core home and garden business. And it has room to run further, given that it has a distribution network via Home Depot, which carries SMG’s Black Magic line of hydroponic soil and equipment in 165 of its stores.

Nobody knows for sure where this industry is headed. There are simply too many question marks, including what will happen to the price as supply continues to increase (Hint: It’s likely to plunge, which will reduce margins and make investment opportunities even scarcer than they are today) and how the federal government will ultimately treat it. Despite the business of marijuana having enormous promise, it’s too early in the cycle to know where the profits will come from.

By CEO Ross Gerber

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Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.

Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.