Better Marijuana Stock: HEXO vs. Scotts Miracle-Gro

Keith Speights, The Motley Fool

After a great start this year, many marijuana stocks have been hammered over the past couple of months. HEXO (NYSE: HEXO) is one of them, with its share price nearly 40% off its highs from earlier in 2019. On the other hand, Scotts Miracle-Gro (NYSE: SMG) is a notable exception, with shares continuing to steadily rise throughout the year.

Which is the better marijuana stock to buy now? Here's what you need to know about Scotts Miracle-Gro and HEXO.

Marijuana leaf on top of hundred dollar bills

Image source: Getty Images.

The case for Scotts Miracle-Gro

Scotts Miracle-Gro focuses on two key markets: consumer lawn and garden products and supplies for the cannabis industry. You have to keep both of these markets in mind when considering investing in the stock.

The company made nearly 90% of its revenue in the second quarter from its consumer lawn and garden products business. This business rakes in the cash during warmer seasons when consumers pay attention to their lawns and gardens. 

Because of this benefit from warmer weather, Scotts Miracle-Gro is a stock that could profit from moderate climate change. If temperatures rise earlier than normal and cold weather comes later than it typically does, sales of the company's consumer products should increase.

Scotts isn't dependent on climate change for growth, though. The company continues to launch new products, including a line of organic fertilizers, that fuel sales growth. 

The company's Hawthorne subsidiary focuses on products for the cannabis industry. Scotts Miracle-Gro was one of the first major players to see the potential in the cannabis market. CEO Jim Hagedorn said in the company's Q2 conference call that the cannabis industry "has great potential," adding that "we are better positioned than anyone to win."

That's not just spin. Hawthorne is the market leader in supplying gardening products to the cannabis industry. As more U.S. states legalize medical or recreational cannabis, Hawthorne's sales should increase significantly.

There's also one other thing for investors to really like about Scotts Miracle-Gro: its dividend. Scotts' dividend currently yields over 2.1%, making it one of the top three cannabis stocks with the highest dividend yields.  

The case for HEXO

Unlike Scotts Miracle-Gro, HEXO is a pure-play marijuana stock. The company is a leading cannabis producer in its home country of Canada and claims a leading market share in Quebec's adult-use recreational cannabis market.

That advantage in Quebec is a big reason to consider buying HEXO. Quebec is the second-largest Canadian province based on population. HEXO has a long-term supply agreement in place with Quebec that should preserve its leading market share for at least several more years.

HEXO should be in a good position to meet its supply commitments thanks to its acquisition of Newstrike Brands. This deal boosts HEXO's annual production capacity to around 150,000 kilograms.

Another big plus for HEXO is its partnership with Molson Coors Brewing. The two companies formed a joint venture to develop cannabis-infused beverages for the Canadian market that will open for business later this year.

HEXO CEO Sebastien St.-Louis expects his company will forge partnerships with additional major players from outside the cannabis industry. He said in HEXO's Q3 conference call in June that HEXO is talking with over 60 Fortune 500 companies. St.-Louis thinks that HEXO could announce a partnership with at least one of these large organizations next year.

An additional partnership could be key for HEXO to make its mark in the huge U.S. market. In May, HEXO formed a U.S. subsidiary to focus on the hemp cannabidiol market.

Better marijuana stock

My view is that both of these stocks have great growth prospects. HEXO is probably more likely to generate the biggest returns over the next 12 months. The stock is well off its highs. I expect stronger results from HEXO over the next few quarters and into next year. The stock would also likely jump if HEXO picks up another major partner.

But HEXO faces a lot of competition. There's a lot of risk for the stock. For this reason, I think that Scotts Miracle-Gro is the better pick over the long run. Scotts has a solid lead in its market. If cannabis is legalized at the federal level in the U.S. (which I expect to happen sooner or later), Scotts would benefit significantly. I also think that Scotts' consumer business should deliver steady growth. 

This could be a scenario like the fable of the race between the tortoise and the hare, where Scotts Miracle-Gro is the tortoise and HEXO is the hare. And we all know who won that race.  

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.