We talk a lot about the dominating position enjoyed by the largest producers of cannabis; that quality will get more, not less, important going forward.
But in a sector like marijuana, the niches (the needs that the biggest players can't or won't address) will be critically important... and - make no mistake - very lucrative.
One of the most important niches will be specialized cannabis growing equipment. This is important to several groups of consumers.
There are medical patients, for instance, who might have difficulty making it to a dispensary, or recreational enthusiasts keen on growing their own supply for the satisfaction of knowing exactly what's in the final product.
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This is a rapidly growing niche, and if you've been a Money Morning Member for a while, you've had the chance to reap double-digit gains already.
Well, this market segment - and the profits - are going to get even bigger...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
We've Enjoyed an Early Advantage Here
In 2016, my colleague, Money Morning Defense and Tech Specialist Michael A. Robinson, recommended Scotts Miracle-Gro Co. (NYSE: SMG) as a low-risk "back door" to investing in a cannabis sector that was still very, very new.
Robinson is one of the top analysts in the market; he knew the companies like Scotts that provided the "stuff" that growers need to conduct the business of growing would have the inside track to early marijuana sector profits.
"In regards to Scotts Miracle-Gro, I was pleased to see the strength of its earnings and that it raised guidance, which are two bullish signs for the stock. Sales being up 245% at the Hawthorne Gardening Co. hydronic unit is particularly important. Booming demand for hydroponic equipment tells me our belief that this is a great cannabis supplier is dead on the money," Robinson told me.
Fast-forward to 2019, and Scotts' foresight in this regard is producing some eye-opening numbers. It reported $3.11 per share at its most recent reporting on July 31, easily demolishing the consensus estimate of $2.71. This is the third time in four quarters that Scotts has delivered an "upside surprise."
Now, Scotts is still as sound an investment as ever, but its recent quarterly results prompted me to do some investigating as to who might be next in the cannabis "grow-tech" segment.
I followed the trail all the way to Israel.
This Firm Has a (Very) High-Tech Growing Solution
Seedo Corp. (OTCMKTS: SEDO) was founded in 2015 in Israel, and the company says you can use its self-contained grow box to grow plants and vegetables.
Using such devices to grow celery and mint is becoming popular, with AeroGrow International Inc. (OTCMKTS: AERO) recently reporting a 35% increase in revenue for the fourth quarter that ended March 31, 2019.
But let's face it: Cannabis is going to be a far more lucrative market for Seedo.
One of the challenges for cannabis equipment companies is that growing quality marijuana isn't easy. First-time growers have to figure out the right soil to use, how to set up a lighting system - a whole host of considerations that can be time-consuming and expensive to learn and implement properly.
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By having tech and equipment work together, Seedo has seemingly found a solution.
"Think of Seedo as the first driverless car for hydroponic growing," the company says on its website.
Installation is simple; all you really need is water, electricity, and the Internet to grow a cannabis plant. Through the company's app (naturally), you can even choose a growth recipe.
Seedo received 3,000 preorders for a trial run that generated a modest $7.2 million - good money for an insurgent startup. Just as important, the trial run also generated positive reviews. So Seedo is looking to start mass production at the end of 2019, and it aims to deliver product by the first quarter of 2020.
Seedo Has Promising Leadership
I've talked before about how talented consumer packaging and branding executives are flocking to the cannabis industry.
With Seedo, I found the same thing with the appointment of Daniel Birnbaum as a board member. Birnbaum was the CEO of SodaStream International Ltd., another "DIY" device. SodaStream was acquired by PepsiCo Inc. (NASDAQ: PEP) last year for $3.2 billion.
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With his experience, it's possible Birnbaum can help the company become an acquisition target.
On top of landing Birnbaum as a board member, Seedo has a partnership with Kibbutz Dan, a 90-year-old "kibbutz" (agricultural cooperative community) in northern Israel that supplies, among other things, world-famous caviar to to some of the world's finest restaurants.
Through this partnership, Seedo will produce commercial-scale cannabis farms that are fully automated. Those farms are expected to produce $24 million worth of cannabis over the next three years.
Now, Seedo knows the up-front cost of $2,400 for a growing system isn't exactly cheap for consumers, but it has an elegant solution: a leasing program that allows the customer to pay a much smaller down payment, with monthly payments to follow for a defined term.
Seedo could also make money selling or leasing its equipment and technology to larger-scale producers looking to develop their own automated farms.
What to Know Before You Decide to Invest
Now, Seedo is way too small right now for me to recommend outright; though as a small, speculative position, you may find it agrees with your risk tolerance and goals.
I'd also like to see Seedo hone its strategic approach. The best cannabis firms have one strategy the leadership executes well; when a dog chases two rabbits, there's a chance it'll come up empty-handed.
And the idea of "cannabis in a box" is not unique to Seedo. There are several companies pursuing this technology with different twists on the box and different ways to monetize the machines. None has quite the firepower of Birnbaum, but his vision alone likely won't get Seedo over the finish line. But cannabis investors ignore this market segment at their own peril.
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About the Author
Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.
During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.
After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies. He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.