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3 Second-Derivative Pot Stocks for Conservative Investors


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Marijuana definitely looks set to boom. California has already legalized recreational pot use,  while Canada and New Jersey appear to be poised to allow it. And President Trump recently decided not to interfere with states' decisions on marijuana legalization. It seems like a great time to buy pot stocks.

And yet, there are certainly tremendous risks to investing in marijuana stocks, as The Motley Fool points out. Even with Trump's announcement, there are still political risks. For example, Trump could get impeached or resign, leaving the more  traditional conservative, Mike Pence, who has been very much opposed to pot use in the past, in charge of the executive branch. Someone besides Justin Trudeau could become prime minister of Canada, potentially leaving an anti-pot conservative in charge of Canada's government. Moreover, as The Motley Fool points out , many marijuana stocks have high valuations, inexperienced leaders, and face intense competition.

More conservative investors who want to benefit from the pot trend should choose lower beta, second derivative plays whose stocks will not drop like a rock if events adverse to marijuana legalization occur. These 3 marijuana stocks will get higher with the cannabis movement, but don't depend on it entirely.

Second-Derivative Marijuana Stocks: Hostess Brands (TWNK)

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Hostess Brands Inc (NASDAQ: TWNK ) stock is a great play on marijuana legalization  in the U.S. because it, unlike many other snack makers like Mondolez International Inc (NASDAQ: MDLZ ) , The Hershey Company (NYSE: HSY ) and The Kraft Heinz Company (NASDAQ: KHC )  , sells the lion's share of its products in the country.

And it turns out that the idea that people experience "the munchies" after smoking pot is not a rumor or an old-wives tale. In fact, researchers from Yale University found that neurons in the brain which usually suppress appetite make people extremely hungry when they smoke pot. And the phenomenon occurs even when pot smokers are full, the researchers found.

Moreover, according to CNN, "marijuana munchies" refers to "the desire for salty, sweet, or fatty carbohydrates rich foods." Hostess Brands specializes in selling " fresh sweet baked goods,"with an emphasis on "coffee cakes, cinnamon rolls, honey buns, brownies, bread and buns, jumbo muffins, and eclairs." so it certainly can cater very well to the pot smokers who love "sweet" and carbohydrates rich foods"  when they have "munchies."

Hostess also already has a solid, profitable business, as it expects to generate adjusted EBITDA of $220 million-$230 million and EPS of 65-70 cents this year. Hostess stock is also down about 15% this year, and it's trading at reasonable valuations, with a forward price to earnings ratio of 15.7 and an enterprise value of $2.16 billion.  Going forward, Hostess could easily become a takeover target for a large, multinational foreign food company that is looking to penetrate the U.S. market and exploit our pot legalization trend.

Second-Derivative Marijuana Stocks: Scotts Miracle-Gro (SMG)

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According to this "short guide to picking the best fertilizer for your marijuana plants," fertilizer is a key element to growing cannabis plants. The guide lists Scotts Miracle Gro (NYSE: SMG ) as a viable fertilizer pick, citing its low cost and solubility in water. The blog does, however, point out that "same users complain of an ammonia taste, and some growers report that the fertilizer burns plant out."

But Scotts Miracle-Gro has taken a much bigger dive into the marijuana business by buying multiple companies that specialize in providing products for hydroponics, which is the process of  growing plants in a liquid, usually water. Using hydroponics to grow pot yields more of the plant  in a faster time than growing plants in soil.

Scotts has placed its hydroponics businesses under the umbrella of a subsidiary called Hawthorne., which sells "all the equipment necessary for" the endeavor, according to Seeking Alpha .   The subsidiary's revenue jumped 17.8%, excluding acquisitions, in fiscal 2016 and 23.2% in fiscal 2017. Incorporating acquisitions, its revenue jumped 153% in 2016 and 137% in 2017.

Lately, however, Hawthorne has gone in the opposite direction. In the second quarter, the unit's revenue sank 20% year-over-year.

Scotts Miracle-Gro CEO Jim Hagedorn blamed the decline on adverse conditions in California, which he said generated about 55% of the subsidiary's  revenue in 2017. Specifically, the CEO said that many California pot growers bought a great deal of equipment last year in anticipation of the legalization of recreational marijuana in the state, while California counties have been slow to grant licenses to pot growers and dispensaries, although the number of licenses grew to 3,200 as of May 1, up from just 500 when Scotts had its first quarter results conference call on January 30. Other factors that may be in play include the unit's difficulties in integrating its many acquisitions and management problems at the subsidiary, which is headed by Hagedorn's son, Chris.

However, as the CEO pointed out, consumer demand for pot is continuing to increase, and more states are making the drug legal, while the number of licenses issued by California is increasing. All of those changes should greatly benefit Hawthorne over the longer term, lifting Scotts Miracle-Gro's profits and Scotts Miracle-Gro stock in the process. Meanwhile, the unit will figure out how to integrate its acquisitions better, and the board will pressure the CEO into choosing a new leader for Hawthorne if necessary.

Second-Derivative Marijuana Stocks: PG&E (PCG)

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As The Gurdian newspaper put it, "pot is power hungry." Specifically, the industry often requires " 24-hour indoor lighting rigs, heating, ventilation and air-conditioning systems at multiplying grow sites," the newspaper stated. That's where  PG&E Corporation (NYSE: PCG ) comes in.

Legalized indoor pot growing already accounts for 1% of total U.S. electricity use, and pot growers now account for about half of the state's demand for new power, the newspaper added.

The American Public Power Association  published an article which supports The Guardian's assessment. The association's article quoted Lou Loos, an account manager with the Snohomish County Public Utility District in Washington state as saying that:"a cannabis grow operation compares with the (electric) load profile of a data center or a hospital."

A representative from a southern California utility said that medical marijuana growers are among its "premier customers," and one small Colorado town that welcomed pot growers after marijuana legalization saw its electricity demand increase 26%, while its revenue from electricity rose 26% in 2017 versus 2016.

As California's legal pot industry rapidly expands,  PG&E is well-positioned to benefit from the growth. The company serves all of the heavily populated areas of northern California, which has many millions of people with high incomes and libertarian and left-wing beliefs. Such people tend to consume pot at high rates.

Although some utilities don't profit when energy bills  rise, PG&E apparently does, as The San Jose Mecury News reported that the company's profits " nearly doubled in the second quarter (of 2017)….after it raised customers' monthly energy bills in January."

As the article points out, PG&E is able to raise rates when it obtains regulatory approval to expand its infrastructure. Higher electricity use sparked by increased pot production will  create the need for new infrastructure, such as transmission lines, that will raise PG&E's top and bottom lines.

As of this writing, Larry Ramer did not own shares of any of the companies named.  

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The post 3 Second-Derivative Pot Stocks for Conservative Investors appeared first on InvestorPlace .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: TWNK , SMG , PCG , MDLZ , HSY



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