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How America's garden stalwart became a pot investors' dream

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The growing national movement to legalize marijuana is giving a boost to an unlikely company: the lawn-care giant Scott’s Miracle-Gro (SMG).

While most Americans will be familiar with Scott’s garden and lawn-care products -- like Turf Builder and its bagged potting mix -- the company has recently made a bet on the growth of the legalized marijuana industry by expanding into hydroponics. Investors are taking notice, sending Scott’s shares up by more than 30 percent this year alone, compared with a rather sober 4.5 percent increase for the S&P 500 index.

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The legal cannabis industry is a growing market, yet there aren’t many public companies that provide investors with a way to make a bet on its future. The industry may expand eightfold to $50 billion in the next decade, according to a recent report from Cowen & Co. Scott’s has been buying up hydroponics companies, making a bet that the water-based method of growing indoor crops will see higher demand as legalized pot gains traction.

“In states where the laws have evolved to allow the legal cultivation of cannabis, in almost every one of those states, that’s happening using hydroponic growing methods,” Scott’s chief financial officer, Thomas Randy Coleman, said at a conference last month, according to Bloomberg News. “We have the benefit of growing from that.”

Scott’s is focusing on expanding its Hawthorne Gardening Company brand with the goal of becoming a “house of brands for hydroponic retailers and gardeners,” CEO James Hagedorn said in an earnings call earlier this year. He said Scott’s expects to invest as much as $300 million to pursue that goal.

The gardening company has been on a buying spree to make its pipe dreams come true. Last year, Scott’s shelled out about $120 million to purchase General Hydroponics, a California company that provides supplies to indoor marijuana growers. Scott’s also bought Vermicrop, which provides liquid plant food for hydroponic growing, for $15 million last year.

Cannabis legalization has been picking up support, with four states and Washington, D.C. approving the drug for recreational use. Several other states have legalized pot as a medication, while voters in California and four other states where medical marijuana is legal will vote in November on authorizing its recreational use.

Given how America’s views on marijuana have shifted over the past few decades, it’s not hard to understand why Scott is investing in hydroponics. Support for marijuana legalization has reached an all-time high, with 61 percent of Americans saying they believe it should be made legal, according to a February survey from AP-NORC Center for Public Affairs Research.

Investors, for their part, are flocking to Scott to make an investment play on the growing market for legalized pot. One thing in Scott’s favor: there aren’t many other ways for investors to put their money into pot-related ventures, short of risky venture investments in dispensaries or farms.

There are a few smaller publicly traded companies involved in the pot industry that are also witnessing a share boost. Shares of Kush Bottles (KSHB), which makes packaging for the pot industry, have doubled since September, while cannabis pharmaceutical company GW Pharmaceuticals (GWPH) has also seen its shares rise sharply this year. 

So far, Scott’s executives said they’re satisfied with their push into hydroponics. “I feel really good about how that business is performing right now,” CFO Coleman said earlier this year on a conference call. 

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