4. The Scotts Miracle-Gro Company (NYSE:SMG)
Number of Hedge Fund Holders: 29
Forward P/E as of February 6: 11.74
Though The Scotts Miracle-Gro Company (NYSE:SMG) is a lawn products seeds and pesticides company, it was one of the first entrants into the cannabis market. Back in 2011, talking to Wall Street Journal, The Scotts Miracle-Gro Company (NYSE:SMG) CEO Jim Hagedorn said:
“I want to target the pot market.. There’s no good reason we haven’t.”
Over the years The Scotts Miracle-Gro Company (NYSE:SMG) has made several investments in the Hydroponics space which have made the company one of the best cannabis stocks to buy today.
As of the end of the third quarter of 2022, 29 hedge funds tracked by Insider Monkey reported owning stakes in The Scotts Miracle-Gro Company (NYSE:SMG). The net worth of these stakes was over $128 million. The biggest stakeholder of The Scotts Miracle-Gro Company (NYSE:SMG) was Jean-Marie Eveillard’s First Eagle Investment Management, which owns a $67.3 million stake. The second biggest stakeholder of The Scotts Miracle-Gro Company (NYSE:SMG) was Ken Fisher’s Fisher Asset Management which has a $32 million stake in the firm.
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.”
