2 Beaten-Up U.S. Cannabis Stocks Wall Street Says Can Soar 154%–288%

Outlook Bullish for GrowGeneration Stock & Hydrofarm Stock

COVID-19 might have taken the wind out of the sails of many stocks in 2020, but U.S. cannabis stocks did fairly well that year. In eight of the 11 U.S. states where recreational marijuana was legal at the time, cannabis dispensaries were declared “essential,” just like grocery stores.

U.S. cannabis stocks got an additional boost in 2020 thanks to the Democrats’ loud proclamation that they would federally legalize cannabis if elected.

But that’s where the party ended. Like a high-school presidential election promise, that promise has been forgotten. And that political apathy has led U.S. cannabis stocks to careen lower.

ETFMG Alternative Harvest ETF (NYSEARCA:MJ), the world’s largest cannabis exchange-traded fund (ETF), ended 2020 down by approximately 10%, but it rallied by more than 30% following the November 2020 U.S. presidential election. In the opening weeks of 2021, investor optimism sent the ETF soaring by roughly 140%.

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It’s been all downhill since then. Trading at its lowest level since October 2020, ETFMG Alternative Harvest ETF is down by:

  • 23% over the last three months
  • 40% over the last six months
  • 45% over the last year

Suffice it to say, the slow-footedness of politicians in Washington, D.C. hasn’t been kind to U.S. cannabis stocks. At the same time, the bloodbath means some amazing marijuana stocks have been trading at a bargain.

Two cannabis stocks that even conservative Wall Street analysts say could more than double over the next 12 months are GrowGeneration Corp (NASDAQ:GRWG) and Hydrofarm Holdings Group Inc (NASDAQ:HYFM).

Chart courtesy of StockCharts.com

GrowGeneration Corp

As of this writing, GRWG stock is down by:

  • 33% over the last month
  • 60% over the last three months
  • 76% over the last six months
  • 83% over the last year

Instead of running for the hills, Wall Street analysts think marijuana stock investors should take a hard look at GrowGeneration stock. Their average price target for GRWG stock over the next 12 months is $17.92, and their high estimate is $35.00. This points to potential gains of 100% or 288%, respectively.

GrowGeneration Corp is the largest hydroponics supplier in the U.S., with 62 stores and three distribution centers in 13 states. It also operates an online superstore. (Source: “4Q21 Preliminary Update January 2022,” GrowGeneration Corp, last accessed January 20, 2022.)

The number of its stores is expected to hit 65 after the company finishes expanding in Michigan. (Source: “GrowGeneration Signs Asset Purchase Agreement to Acquire Nation’s Third-Largest Chain of Hydroponic Garden Centers,” GrowGeneration Corp, July 28, 2021.)

In November 2021, the company said it was expecting to open up to 20 new locations in 2022. (Source: “GrowGeneration Reports Record Third Quarter 2021 Financial Results,” GrowGeneration Corp, November 11, 2021.)

The company sells more than 10,000 products—including organic nutrients and soils, advanced lighting, and other state-of-the-art equipment—to commercial and home growers. The company owns several product brands, and it has a strategy to increase its private brands and private-label offerings. (Source: “4Q21 Preliminary Update January 2022,” GrowGeneration Corp, op. cit.)

Another Quarter of Record Results

U.S. cannabis stocks may have taken a hit recently, but GrowGeneration Corp hasn’t done anything to warrant the recent sell-off of GRWG stock. In fact, in 2021, the company reported record financial results all year long.

In the third quarter of 2021, its revenue climbed by 111% year-over-year to a record $116.0 million. Its comparable same-store sales rallied by 15.7%. (Source: “GrowGeneration Reports Record Third Quarter 2021 Financial Results,” GrowGeneration Corp, November 11, 2021.)

The company’s third-quarter net income was up by 21% year-over-year at $4.0 million, or $0.07 per share. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were a record $10.8 million, or $0.18 per share, compared to $6.6 million, or $0.13 per share, in the same period of the previous year.

GrowGeneration Corp ended the third quarter with cash and short-term securities of $93.0 million.

On January 13, 2022, GrowGeneration provided a revised full-year 2021 update. The company estimates that its 2021 revenue was in the range of $420.0 to $422.0 million, up from its record $193.0 million in 2020. (Source: “GrowGeneration Provides Fourth Quarter and Full Year Updated Outlook with Record 2021 Annual Revenues,” GrowGeneration Corp, January 13, 2022.)

GrowGeneration Corp’s fourth-quarter 2021 revenue is expected to be between $88.0 and $90.0 million, compared to its record fourth-quarter 2020 revenue of $62.0 million.

Despite the high estimated gains, management said the company experienced stronger-than-expected pressures in the fourth quarter due to a general slowdown in the hydroponics market.

Management forecasts that the company’s sales results for the fourth quarter of 2021, combined with one-time expenses, will result in an adjusted EBITDA loss in the range of $2.0 to $4.0 million.

GrowGeneration Corp’s solid balance sheet and cash flow generation should help it deliver revenue and EBITDA growth in 2022 and drive profitability over the next decade.

Hydrofarm Holdings Group Inc

Currently trading around $22.00, Hydrofarm stock is down by:

  • 17% over the last month
  • 35% over the last three months
  • 53% over the last six months
  • 68% over the last year

Dire numbers indeed, but Wall Street is upbeat about HYFM stock. Of the analysts providing a 12-month price target for Hydrofarm stock, their average estimate is $39.80 and their high estimate is $56.00. This points to potential gains of 80% and 154%, respectively.

Hydrofarm Holdings Group Inc is a leading North American manufacturer and distributor of hydroponic equipment and supplies. For over 40 years, it has helped make cultivating plants easier and more productive.

The company provides high-intensity lights, climate control solutions, fertilizers, additives, and other supplies, including proprietary branded products. (Source: “Investor Relations,” Hydrofarm Holdings Group Inc, last accessed January 20, 2022.)

That’s ideal for cultivating flowers, fruit, vegetables, grains, and herbs. For Hydrofarm, however, its biggest business growth driver is cannabis.

The company has eight North American distribution locations and seven manufacturing sites. It also owns one distribution location in Spain. (Source: “Investor Presentation: January 2022,” Hydrofarm Holdings Group Inc, last accessed January 20, 2022.)

In North America, Hydrofarm Holdings Group Inc has approximately one million square feet of distribution space and can deliver products to 90% of the U.S. population in less than 48 hours.

Strong Q3 2021 Results

For the third quarter ended September 30, 2021, Hydrofarm announced that its revenue increased by 28% year-over-year to $123.8 million. Its gross profit went up by 65% year-over-year to $30.0 million, or 24.2% of its net sales. (Source: “Hydrofarm Holdings Group Announces Third Quarter 2021 Results,” Hydrofarm Holdings Group Inc, November 11, 2021.)

The company’s net income in the third quarter of 2021 was $17.3 million, or $0.37 per diluted share, compared to $2.0 million, or $0.08 per diluted share, in the third quarter of 2020.

Hydrofarm Holdings Group Inc’s pro forma adjusted net income in the third quarter of 2021 was $7.7 million, or $0.17 per pro forma diluted share. That’s compared to $4.3 million, or $0.13 per pro forma diluted share, in the third quarter of 2020.

The company’s adjusted EBITDA in the third quarter of 2021 were $16.1 million, or 13.0% of its net sales. That was more than a twofold increase from the $7.4 million, or 7.7% of net sales, in the third quarter of 2020.

Hydrofarm Holdings Group Inc also reaffirmed its full-year 2021 outlook of:

  • Net sales of approximately $470.0 to $490.0 million, representing year-over-year growth of 37% to 43%, respectively
  • Adjusted EBITDA of $47.0 to $53.0 million
  • Organic growth of approximately 18% to 23%
  • Merger-and-acquisition growth of approximately 19% to 20%

Analyst Take

Hydrofarm Holdings Group Inc and GrowGeneration Corp are excellent cannabis stocks that are, according to Wall Street, trading at a steep discount.

Together, the companies have a big foothold in the $1.0-trillion North American commercial agricultural, food, marijuana, and related industries. Moreover, the North American cannabis market has been expanding at a compound annual growth rate (CAGR) of 22%.

That’s good news for investors of GrowGeneration stock and Hydrofarm stock.