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Scotts Miacle-Gro (NYSE: SMG) is Oversold, but I’m not a Buyer. Here’s why …

Should Cannabis Investors Buy Scotts Miracle-Gro (NYSE: SMG)?

Written by Jeff Siegel
Posted August 6, 2018 at 2:43PM

Scotts Miracle-Gro (NYSE: SMG) CEO Jim Hagedorn is all fired up!

According to CNBC, Hagedorn was upset about disappointing financial expectations for Hawthorne Gardening, which is Scotts’ cannabis subsidiary that’s currently in the process of acquiring Sunlight Supply

Scotts announced in April it would acquire Sunlight Supply, intending to combine it with Hawthorne in an effort to build its cannabis-grower business. Hagedorn said Wall Street analysts should "bear with" Scotts as "we're working on" achieving the "synergy" it promised with the acquisition.

On more than one occasion, I’ve opined on Scotts’ entrance into the cannabis space.

There’s no doubt that Scotts’ major stake in cannabis is bolstering its growth prospects. Certainly a behemoth like Scotts, with its massive stacks of cash and major marketing muscle, could end up being the first major corporate giant to lock in a significant chunk of the market. Ultimately, this will be good for shareholders. If I were a shareholder, I certainly wouldn’t worry about this recent hiccup. It’s all a part of the process, and I would encourage investors to not blow this up to be more than it is.

Of course, I’m not a shareholder, and really have no intention of buying the stock. Particularly as a way to gain more exposure to the cannabis space.

Truth is, while I don’t think SMG is a bad stock to own, I’m still not convinced Scotts’ exposure to the industry is actually good for the industry.

Weed, Pesticides, and the Opportunity to do Well by Doing Good

Without a doubt, Scotts’ ability to pump so much capital into the space is positive. The company can certainly provide commercial-scale efficiencies the industry has never seen before.

That being said, from the perspective of a socially-responsible investor, I am concerned about how Scotts’ impact on the industry will affect any chance of the cannabis space operating in a responsible, sustainable manner.

Let’s face it, while Scotts considers itself a lawn, garden and outdoor living company, it’s really a pesticide company. And quite frankly, a $4 billion international pesticide company moving into the cannabis space is a bit unnerving.

Scotts makes environmentally hazardous products that we pour and pump all over our lawns and gardens. Do we really want this stuff in our cannabis, too?

Of course, there’s already plenty of pesticides being sprayed all over a lot of the cannabis we buy today. So it’s not just Scotts that represents a potential danger to the industry. And that’s too bad. But it’s still fairly early in the game, and I would hope the gatekeepers of this industry recognize the incredible opportunity we have here to build a multi-billion-dollar, socially-responsible industry.

The cannabis industry can be a transformative model of responsible capitalism.

The sector already employs a higher percentage of women executives than any other sector in the U.S.

The cannabis industry also produces and sells a product that can not only help a lot of sick people get better, but it can also help alleviate the economic and social burdens that are the result of the war on drugs.

This industry is proving to be a force for good. And while I don’t discourage the big corporations to come in and capitalize on this industry, I’d be lying if I said I was excited about them bringing in an outdated model of capitalism to this incredibly wonderful market.

The bottom line is that Scotts is in the cannabis industry, and it’s likely to have a huge impact on how growers produce their crops. This is a given. But if we truly believe this industry is special and can really make a positive impact on the world, then we must act in an environmentally and socially responsible way, and expect other entrants into this space to do the same.

Of course, if investing in a socially-responsible manner is of no interest to you, Scotts Miracle Gro looks a bit oversold at these levels. The stock is likely worth about $85 a share. You can buy it for about $78 today. It also pays a dividend.

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