Which Cannabis Stock is Cramer Bullish On?

The Scotts Miracle-Gro Company (SMG) is up more than 4% today. This move comes after Jim Cramer said that Bank of America’s upgrade on the company, from Sell to Buy, due to its focus on the burgeoning cannabis industry.

Cramer went on to say how this was a brilliant upgrade and discussed how businesses in Napa Valley are being affected by the cannabis boom. Cramer said that some of the grapes grown for the best pinot noirs in the world are being plowed under for cannabis.

Although Scotts was the main feature of this highlight, the most significant beneficiary so far has been AeroGrow International (AERO), which was up more than 15% earlier today.

This moves comes after Scotts announced last week that its subsidiary exercised its right to establish an 80% ownership stake in AeroGrow. Under the terms of the transaction approximately 21.6 million shares of AERO were issued to SMG for $47.8 million.

After this was announced, AeroGrow separately announced that its Board of Directors has declared a $41 million distribution, equivalent to $1.21 per share, payable Jan. 3, 2017. AeroGrow is expected to repay Scotts Miracle-Grow a roughly $5.25 million loan used for working capital purposes.

In 2013, Scotts’ subsidiary established an approximately 31% stake in AeroGrow. Since that time, the business has demonstrated strong and consistent growth with a leading line of consumer indoor gardening systems. Scotts’ subsidiary’s involvement in AeroGrow is managed within its wholly-owned subsidiary, The Hawthorne Gardening Company.

A Portfolio of Acquisitions

The Scotts Miracle-Gro has continued to add to its portfolio of hydroponic businesses. In June 2015, Scotts’ subsidiary Hawthorne Gardening Co. purchased 75% of Gavita Holland BV for $136 million.

Also in 2015, the company announced a deal to acquire Santa Rosa-based General Hydroponics. Scotts’ subsidiary also acquired that company’s sister business Bio-Organic Options, which sells organic soils and other gardening supplies under the Vermicrop brand.

Scotts Miracle-Gro has been quietly making moves to enter the cannabis industry. The company is focused on acquiring ancillary products that are levered to the growth of the industry which we believe is the right approach.

JP Morgan Recommends Scotts Earlier this Year

In early August, JPMorgan (JPM) also recommended Scotts to its clients and changed its rating to Buy from Hold because it believes Scotts’ recent hydroponics business acquisitions will pay off as legal marijuana use increases.

JPMorgan’s analyst said, “We view Scotts as a reasonably valued investment over a longer time frame as weather impacts have understated Scotts’ sales growth and Scotts’ investment in its faster growing hydroponics portfolio should provide further upside.”

Weakness Creates Opportunity

Although we were favorable on Scotts’ announcement last week, AERO plunged more than 25% after its initial rally. The shares traded as low as $3.27 on Friday and today, AERO is north of $4.35.

We remain favorable on both Scotts and AeroGrow as we expect to see the companies continue to benefit from the global cannabis industry.

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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