WASHINGTON, January 16, 2018: Previously, we explored the obscure world of Canadian (medical) marijuana stocks along with the somewhat less obscure ETF that follows the American and Canadian marijuana industry: ETFMG Alternative Harvest ETF (trading symbol: MJX). But that’s not the whole story about today’s budding marijuana business. In plain sight but without publicity, there exists a select group of well-known companies have partially morphed into what we might call covert marijuana stocks.
A considerable portion of the MJX ETF portfolio is invested in companies whose only business is cannabis. But a significant part of this portfolio consists of large, well-known companies that have quietly been getting involved in commercially viable area of medical and recreational marijuana. That’s why I call these shares “covert marijuana stocks.”
Covert marijuana stocks are mature, well-established but low-growth companies in the Big Tobacco and home gardening businesses that see the need to rejuvenate their businesses and product areas to attract both new customers and growth-oriented investors as well. That’s exactly why you’ll find traditional tobacco stocks and one very prominent home gardening stock inluded in the MJX portfolio. Such covert marijuana stocks have a keen interest in this potential high-growth arena, as their traditional businesses, while lucrative, have either plateaued or are no longer growing at all.
Tobacco giants, anyone?
Big Tobacco stocks were an absolute godsend for seasoned investors during the Great Recession. Investors still in the market in 2008-2010 were desperate for at least modest capital gains and outsized dividends. Tobacco companies have always provided both, and proved a safe harbor during that disastrous period. This still holds true even today in 2018, even though these companies have lost their luster for investors and remain under constant attack by virtue-signaling progressives and greedy state and Federal legislators alike.
This explains why Big Tobacco companies have been sidling up to the marijuana market? If your primary, fully legal business has been under constant attack over the last 50, you will constantly be on the lookout for a profitable way to diversify and eventually re-brand that business. That’s doubly true if one potential escape route might involve the kind of business you’re already in. Like smoking. Something other than tobacco.
As duly noted by the Motley Fool, this thought could prove unexpectedly transformative for tobacco companies, and perhaps for long-beleaguered American tobacco farmers as well:
“Earlier this week, global tobacco company Imperial Brands (NASDAQOTH:IMBBY) made a move that could signal the beginning of a budding relationship between the tobacco and marijuana industries. Its action will likely draw a response from fellow global players Philip Morris International (NYSE:PM) and British American Tobacco (NYSE:BTI), as well as U.S. giants Altria (NYSE:MO) and Reynolds American (NYSE:RAI).
“Imperial Brands said earlier this week that it had named Simon Langelier as a non-executive member of its board of directors on June 12. Langelier’s long history with Philip Morris gives him a pedigree that looks perfectly suited the role… He also served as president of Philip Morris’ next-generation products division, which has been working on some of its highest-growth prospects.
“However, what makes Langelier’s appointment interesting is that he’s also the chairman of a company called PharmaCielo: A Canada-based supplier of medicinal-grade cannabis oil extracts and related products. As Imperial Chairman Mark Williamson said, Langelier’s ‘extensive international experience in tobacco and in wider consumer adjacencies will be a great asset to the board….’”
“That has fed speculation after the naming of Langelier that Imperial might make forays into marijuana as well as more fully embracing cigarette alternatives like the heated tobacco products that Philip Morris has introduced so effectively – and that rival British American Tobacco has sought to duplicate.”
It’s not much of a stretch to see a big, longtime purveyor of tobacco products like Philip Morris branch out into medical marijuana first and recreational marijuana later, the latter of which, of course, is generally smoked by users.
Given that Big Tobacco has already gone headfirst into vaping, it’s easy to envision them rejuvenating their businesses further by going all in and pursuing that glittering Acapulco Gold they now see at the end of the smoking rainbow.
The companies and stocks mentioned above are already positioning themselves to take advantage of the medical and recreational marijuana industry. That’s why every one of these covert marijuana stocks are included in the MJX portfolio. An added plus: The outsized dividends most tobacco companies continue to pay will add points to this portfolio’s investment returns.
Scotts Miracle-Gro: A cannabis stock?
Well, yes, sort of. Scotts Miracle-Gro (SMG), that time-honored friend of America’s most successful backyard gardeners and tomato fanatics isn’t establishing a subsidiary to farm their own weed. But they’ve already seen there’s potentially big business supporting individuals and companies that do just that, and they’re moving in on this promising territory.
Notes Motley Fool in a related article,
“Scotts Miracle-Gro doesn’t grow or sell marijuana in any shape, form, or fashion. However, it’s frequently referred to as a marijuana stock. Why? Because Scotts has become the go-to supplier of key products needed by marijuana growers. The company markets fertilizers, hydroponics, and lighting systems that are essential for growing healthy marijuana crops.
“Scotts Miracle-Gro has been aggressively going after the cannabis market. The company’s subsidiary, The Hawthorne Gardening Company, has made several key acquisitions over the last couple of years to build up its hydroponics business. In 2016, Hawthorne bought American Agritech, L.L.C., an Arizona-based leading producer of plant nutrients, plant supplements, and growing systems used for hydroponic gardening, and Gavita, a Netherlands-based marketer of indoor lighting used in the greenhouse and hydroponic markets. More recently, the company acquired lighting systems supplier Agrolux.”
A recent article in Seeking Alpha also weighs in on this exciting new potential for Scotts’ Hawthorne subsidiary, adding some tantalizing details:
“Scotts Miracle-Gro indicated that 28 states have now legalized the cultivation of cannabis, with most of it grown using hydroponics in the US. This gives the company a lucrative market for not only general customers but also potential larger-scale commercial operations as well.
“The company’s vision going forward is to ‘become the leading solutions provider for retail and commercial hydroponics,’ and its category-leading brands remain intact at Hawthorne. Hawthorne only contributed a little more than $35 million of operating profit in fiscal 2017. That’s a small piece of the overall operating profit pie, but it’s also experiencing rapid growth – at 201% year-over-year.”
In other words, while not exactly broadcasting to Mom and Pop America what it’s up to on the side, Scotts is seriously pursuing the cannabis grower. Owning Scotts Miracle-Gro shares, either directly or via MJX, positions you at least in part in a covert marijuana stock. SMG has got the products that both Canadian and American marijuana growers want, particularly if they’re farming this crop in a hydroponic, greenhouse environment.
As I mentioned earlier, whether you’re pro- or anti-marijuana, as a business or as an investor, you have to seize your opportunities where you find them, and not get all squeamish about it. Scotts Miracle-Gro has already placed its bet on a potentially massive new market while still profiting from their traditional business. They’re already there to serve their potential or actual new customers just like they’ve reliably served home gardeners.
Thus, it’s no surprise that MJX also holds a significant number of Scotts Miracle-Gro shares in its broad-based cannabis stock portfolio.
Final thoughts on investing in overt and covert marijuana stocks
Currently, the Feds are locked in a legal battle with states that have established marijuana laws and businesses in direct conflict with Federal law. Given the current environment, marijuana and marijuana-related stocks, along with those who invest in them, face perilous times. This battle could quickly become a serious national issue, putting both marijuana stocks and covert marijuana stocks in constant jeopardy of headline risk. As an investor, that’s not a good place to be.
Making matters worse, most all-marijuana companies currently bleed red ink. If court rulings eventually go against the marijuana industry – which is still in its infancy – it won’t take long for bankruptcy to wipe cannabis companies off the investing map, taking investor dollars along with them.
If you feel compelled to invest in overt and/or covert marijuana stocks, your best move might be to invest in MJX, the marijuana ETF we’ve discussed at length. MJX invests only in the shares of cannabis companies; fellow traveling, legitimate pharmaceutical companies involved in R&D of pain relievers; and, yes, companies like Scotts Miracle-Gro and the Big Tobacco companies, many of which may plausibly end up as dominant players in this industry, presuming it prevails in the courtroom.
While I’m not recommending investments in this speculative arena, at least for the moment, this longtime investor in the stock market would like to impart a bit of old-timer advice: If you want to invest in a speculative area such as marijuana stocks, invest only money that you can afford to lose with a smile. If you lose, then you lose. No permanent harm is done and you’re left with a good story to tell.
On the other hand, if you hit the jackpot in this controversial sector, your big win could give you bragging rights for the rest of your life.
Your comfort level. Your choice.