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Investing in Cannabis with Scotts Miracle-Gro (NYSE: SMG)

Scotts Miracle-Go is a Pesticide Company, not a Cannabis Company

Written by Jeff Siegel
Posted October 18, 2016 at 12:54PM

This past summer, the CEO of Scotts Miracle-Gro (NYSE: SMG) told reporters the company was going to invest about a half billion in the cannabis business.

Since then, the SMG has made some acquisitions and has been very aggressive in claiming a spot at the legal cannabis table. Also, the stock has been soaring.

Take a look …

smgro

Some analysts are suggesting it’s because of SMG’s entrance into the cannabis space.

Jack Kasky from Bloomberg had this to say …

Investors looking for a play in the burgeoning legal U.S. marijuana industry are turning to a company known mainly for its lawn-care products.

After making big bets on pot, Scotts Miracle-Gro Co. has seen its shares soar 31 percent to a record this year as polls indicate California, Massachusetts, Maine, Nevada and Arizona are poised to approve referendums dramatically expanding legal U.S. cannabis use.

Scotts has been on a buying frenzy over the past 18 months, gobbling up leading companies that provide specialty fertilizers, lighting and other supplies for hydroponics, the indoor method of growing crops favored by U.S. cannabis cultivators. The company’s hydroponics business now generates about $250 million of revenue a year. While the products are sold mostly through specialty shops, Scotts’ Black Magic brand for indoor growing is available in 165 Home Depot stores.

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. This is definitely good for shareholders, but is it good for the industry?

A Transformative Model of Responsible Capitalism

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 $3 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 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 producer 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.

And for investors that are as passionate as I am about ensuring our investment dollars aren’t use to fund companies operating in a socially-irresponsible manner, I would definitely not recommend Scotts Miracle-Gro as an investment in the cannabis industry.

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