Scotts Miracle-Gro Co: A Contrarian Play for Pot Stock Investors?

Looking for Value in the Pot Segment? Check Out SMG Stock

In today’s market, there are likely way more trend followers than contrarian investors. It’s human nature: when a stock is soaring, people want to get in on the action, even if things are already going parabolic and pullbacks could be imminent.

The fear of missing out (FOMO) has led plenty of investors to buy at the top. When a stock is tumbling, on the other hand, investors tend to bail because of the fear that it could drop further.

The marijuana sector is probably one of the best places to see this kind of behavior.

Pot stocks were all the rage after the U.S. presidential election in November 2020. The entire sector enjoyed an incredible rally. Then the meme stock frenzy in early 2021—thanks to the enthusiasm of millions of Redditors—only added fuel to the fire. People simply didn’t want to stand on the sidelines.

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But, like most parabolic runs, that rally didn’t last forever. The pullback in pot stocks happened after the segment’s peak in February 2021. And now, the mainstream media doesn’t talk much about pot stocks—whereas just a few months ago, even the smaller pot stocks would get national attention because of their massive daily gains.

So it takes a special kind of pot stock investor to appreciate what Scotts Miracle-Gro Co (NYSE:SMG) is doing right now.

The first thing to note about Scotts Miracle-Gro stock is that it’s not a pot stock in the traditional sense.

The company doesn’t grow, process, or sell any pot. Instead, it’s known as one of the world’s largest marketers of branded consumer products for lawn seed and garden care. Scotts Miracle-Gro Co’s “Scotts,” “Miracle-Gro,” and “Ortho” brands are market leaders in their categories.

But the company is on board the marijuana profit train thanks to its wholly owned subsidiary, Hawthorne Gardening Company.

Hawthorne is a leading provider of nutrients, lighting, growing media, supplements, and other materials used in the indoor and hydroponic growing segment.

With the rise of the legal cannabis industry, the demand for hydroponic growing products has increased substantially in recent years. As a leading distributor of such products, Hawthorne has become a growth machine.

Just look at these figures and you’ll see why SMG stock deserves the attention of pot stock investors.

In the company’s fiscal year 2020, which ended September 30, 2020, Hawthorne generated $1.1 billion of sales, representing a 61% increase year-over-year. (Source: “ScottsMiracle-Gro Announces Record Fourth Quarter and Full Year Results Driven by Strong Product Demand in Both Major Reporting Segments,” Scotts Miracle-Gro Co, November 4, 2020.)

Company-wide sales totaled $4.1 billion for fiscal 2020, which was up by 31% year-over-year. In Scotts Miracle-Gro’s biggest segment, U.S. Consumer, its sales increased by 24% year-over-year to $2.8 billion.

In other words, while Hawthorne wasn’t Scotts Miracle-Gro Co’s biggest segment, it was a major growth driver for the company.

In terms of share price, Scotts Miracle-Gro stock enjoyed a huge rally from late 2020 to early 2021—just like other pot stocks. SMG stock pulled back in late February but had another round of surges in March and reached more than $250.00 per share in early April.

Then, Scotts Miracle-Gro stock seemed to lose its upward momentum and started trending down. At the time of this writing, SMG stock trades at $162.37 per share, roughly $90.00 below its all-time high.

Scotts Miracle-Gro Co (NYSE:SMG) Stock Chart

Chart courtesy of StockCharts.com

The technicals don’t look very bullish in the above SMG stock chart, as the past highs could form a major top. But Scotts Miracle-Gro stock does seem to be extremely oversold based on the reading of the relative strength index (RSI). Considering the size of this downward move already, SMG stock might be a good opportunity for contrarian investors.

Scotts Miracle-Gro stock’s latest price drop started on August 4, which was the day the company released its latest earnings report.

The report showed that, in the third quarter of its fiscal year 2021, which ended July 3, the company generated $1.6 billion of sales, representing an eight-percent increase year-over-year. (Source: “ScottsMiracle-Gro Announces Record Third Quarter Financial Results; Reaffirms Sales and Earnings Guidance for Fiscal 2021,” Scotts Miracle-Gro Co, August 4, 2021.)

Sales from the U.S. Consumer segment declined from $1.09 billion to $1.05 billion—a four-percent drop. However, the Hawthorne segment sales surged from $285.7 million to $421.9 million. That’s a 48% increase!

Simply put, while Scotts Miracle-Gro Co’s biggest segment showed a drop in sales in the reporting quarter, growth from its cannabis-driven business more than offset that decline.

The company has also announced a new acquisition: Hawthorne will be acquiring HydroLogic Purification Systems for $65.0 million. HydroLogic is a leading provider of products, accessories, and systems for water filtration and purification in the cannabis industry.

The transaction, which will expand Hawthorne’s brand portfolio with water filtration and purification products, is expected to add approximately $20.0 million in annualized sales to the company.

Scotts Miracle-Gro Co’s management has clearly identified cannabis as the next big opportunity for the company.

In its latest earnings conference call, the company’s chief executive officer, James S. Hagedorn, said, “Our evolving vision is to create the optionality to have an early mover advantage in the broader U.S. cannabis market when federal law allows.” (Source: “FQ3 2021 Earnings Call Transcripts,” Scotts Miracle-Gro Co, August 4, 2021.)

He continued, “There is little doubt this industry is poised for significant growth. And given our track record, I believe we have an absolute right to win here.”

For full-year fiscal 2021, management has maintained their guidance of 17% to 19% growth in company-wide sales. Specifically, the U.S. Consumer segment is expected to grow by seven to nine percent, while Hawthorne’s sales are projected to rise by 40% to 45%.

Analyst Take

On the day of Scotts Miracle-Gro Co’s latest earnings report, SMG stock tumbled by 6.7%. But, as just mentioned, the actual results—and guidance—weren’t bad at all. And considering the outlook for the cannabis industry, Hawthorne should have no problem continuing to drive growth for Scotts Miracle-Gro.

Bottom line: it’s hard to say when sentiment will turn bullish toward Scotts Miracle-Gro stock. But as it stands, the situation at the company could represent a good opportunity for contrarian investors who want to get some exposure to the cannabis industry.