2. The Scotts Miracle-Gro Company (NYSE:SMG)
Number of Hedge Fund Holders: 24
The Scotts Miracle-Gro Company (NYSE:SMG) is engaged in the production, promotion, and distribution of products targeted at lawn and garden care, as well as indoor and hydroponic gardening. The company has leveraged its expertise in horticulture and gardening to develop innovative technologies and solutions for cannabis cultivation. This includes advanced lighting systems, hydroponic equipment, and other tools designed to optimize growing conditions and maximize yields. It is one of the best marijuana stocks to invest in.
On May 8, JPMorgan analyst Jeffrey Zekauskas upgraded The Scotts Miracle-Gro Company (NYSE:SMG) to Overweight from Neutral, while maintaining a price target of $80. In a research note to investors, the analyst stated that The Scotts Miracle-Gro Company (NYSE:SMG)’s cost pressure related to raw materials has subsided and is now expected to benefit significantly from lower prices of key raw materials. Scotts Miracle-Gro is a major purchaser of urea, potash, polyethylene, and diesel fuel, all of which are currently trading at considerably lower prices compared to 2022. The firm believes that Scotts Miracle-Gro is now an attractive investment option for those with a one-year time frame or a three- to five-year investment horizon.
According to Insider Monkey’s first quarter database, 24 hedge funds were bullish on The Scotts Miracle-Gro Company (NYSE:SMG), compared to 27 funds in the prior quarter. Ken Griffin’s Citadel Investment Group is a prominent stakeholder of the company, with 592,947 shares worth $41.35 million.
Madison Funds made the following comment about The Scotts Miracle-Gro Company (NYSE:SMG) in its Q4 2022 investor letter:
“Stock selection was the poorest for us in this sector. Two stocks in particular – Hain Celestial (HAIN) and The Scotts Miracle-Gro Company (NYSE:SMG) – while big winners for us in 2020 and 2021, hurt the portfolio in 2022.
While both companies were so-called COVID beneficiaries (businesses that benefited from consumers staying home and spending on their homes during COVID), we felt they possessed certain additional drivers that would maintain their fundamentals into 2022 and beyond.
Scott’s Miracle-Gro is arguably one of the great American franchises. The brand is synonymous with lawn care and pest control, has a dominant market share (~60%) with historically-impressive ~30% cash flow margins, and has the country’s largest Cannabis supply business. Scotts’ core business saw a significant windfall during COVID lockdowns. Lawn and garden care is not a growth business, and SMG dominance does not allow for much incremental gain in market share. However, our thesis was that even in a reopening scenario where lawn and garden businesses would revert to the mean, the cannabis market was poised for years of growth as more states legalized recreational use.
What we missed was the highly inefficient structure of the U.S. cannabis market. Currently, California, Colorado, and Michigan have the biggest and most mature markets. However, over the course of the last few years, several very large states and regions have voted to legalize recreational use, including New York, New Jersey, and Connecticut. The fly in the ointment has been Oklahoma, which is a medical marijuana state. Although recreational use is still prohibited, licenses to grow the crop were granted in Laissez Faire fashion to anyone willing to buy one. Oklahoma began to grow and cultivate the crop far in excess of their medical marijuana demand. That excess supply bled into grey markets across the country, devastating pricing for growers in other states. This glut put a near complete stop to capital spending on grow operations. With no new or incremental facilities coming on, Scotts’ Hawthorne business was cut in half from its peak in F21. This, of course, had a devastating effect on the stock.”
