Scotts Miracle-Gro upgraded because it's now one of the few legit ways to invest in marijuana

  • SunTrust Robinson Humphrey raises its rating to buy from hold for Scotts Miracle-Gro shares, citing its recent acquisition in the hydroponics space.
  • "For investors, there is a dearth of ways to play the legalization trend in the public equity markets and SMG is one of the largest companies in terms of market cap with a firm foot in the door of the industry," the firm says.
An employee with medicinal marijuana plants in the flowering room at Tweed INC. in Smith Falls, Ontario, on December 5, 2016.
Lars Hagberg | AFP | Getty Images
An employee with medicinal marijuana plants in the flowering room at Tweed INC. in Smith Falls, Ontario, on December 5, 2016.

Scotts Miracle-Gro's stock will rally as the company's hydroponics businesses benefit from rising legal marijuana use, according to one Wall Street firm.

Hydroponics is the process of growing plants in liquids without the use of soil and is a popular method for cultivating marijuana.

SunTrust Robinson Humphrey raised its rating to buy from hold for the seed and fertilizer company's shares, citing its recent acquisition in the hydroponics space.

Shares of Scotts Miracle-Gro closed up 3.2 percent Tuesday.

Scotts Miracle-Gro announced its acquisition of Sunlight Supply, a large U.S. hydroponic distributor, last month in a transaction was valued at $450 million.

The acquisition of Sunlight Supply "gives SMG immediate impact on the [hydroponics] category," analyst William Chappell said in a note to clients Tuesday. "For investors, there is a dearth of ways to play the legalization trend in the public equity markets and SMG is one of the largest companies in terms of market cap with a firm foot in the door of the industry."

Chappell raised his Scotts Miracle-Gro price target to $100 from $80, representing 22 percent upside from Monday's close.

The analyst noted the company's acquisition of Sunlight acquisition will double the size of the company's hydroponics/cannabis-related sales. He predicts Scotts Miracle-Gro will also gain market share in the legalized marijuana supplies business.

"We believe investors increasingly view the name as a call option on the cannabis legalization trend which should provide a rising floor for the stock," he wrote. "As this business faces easier comparisons in F1Q19 and returns to growth, we also expect investors to jump back on this vehicle for riding the legalization wave."