Why This Pick-and-Shovel Cannabis Stock Says Its Shares Are Too Cheap

The company’s stock is trading at a price-to-earnings ratio less than half of its industry peers and the company has only been in business for two years.

The best pick-and shovel stocks is a cannabis company that has been on the market for less than a year. It has an estimated worth of $200 million but its shares are selling at $1.64, which means it’s only worth $6.32 per share.


During Scotts Miracle-(NYSE:SMG) Gro’s third-quarter results call, CEO Jim Hagedorn made a not-so-subtle comment on the stock’s pricing, stating, “I’m a huge supporter of purchasing our shares at these levels.” While CEOs often say things like this about their businesses, Hagedorn may not be just promoting his own shares in this instance.

The firm is selling its shares at a reduced price since it has the majority of a $750 million share buyback authorization open. Should investors, on the other hand, consider buying?


The buy (back) thesis of Scotts Miracle-Gro

Scotts, which sells lawn and garden products as well as hydroponic growing systems, is a very seasonal business, with 75 percent of its sales coming in the second and third quarters. The business produced monster numbers for these quarters in 2020, aided by the pandemic and increased at-home spending, leaving extremely difficult comparables to match this year. The market was dissatisfied when the business beat these comparables in 2021, sending shares down more than 40% from their 52-week high.

Despite the market’s response, Scotts was able to increase sales by 8% year over year in the third quarter and even increase profits per share by 12% over the same period. “I’m comfortable committing upwards of $250 million to share buyback in the months ahead under our current authorization, so expect for us to do that,” Hagedorn said of the company’s stock price, citing the apparent disparity between the company’s growth and its stock performance. 

At its present price, $250 million in buybacks amounts to 3% of the company’s outstanding shares and provides investors interesting possibilities, since Scotts’ P/E ratio has dropped to 15, compared to the S&P 500’s average P/E of 31. Share buybacks, rather than paying a special dividend, may reduce a company’s overall share count and can be a fantastic method to repay capital to shareholders, particularly if its share price starts to rise over time.

The rapid, secret development of Nathaniel Hawthorne

Hawthorne, Scotts’ indoor and hydroponic growing division, may be the most convincing case for investing in the firm as a pick-and-shovel bet in the marijuana market. Despite difficult comparables, Hawthorne grew sales 48 percent year over year in the third quarter, accounting for 26 percent of the company’s total sales.

Scotts’ fast expanding sector is well positioned to continue benefiting from marijuana’s impending legalization; it provides the lights, fertilizers, and growth medium required to produce it efficiently. The company’s Project Catalyst program, a “company-wide restructuring effort to cut operational expenses,” seeks to enhance the segment’s overall profitability as it continues to bring additional bolt-on acquisitions into the fold. Furthermore, this effort is intended to generate “synergies from Hawthorne sector acquisitions.”

With a profit margin of just 12%, compared to a margin of 26% for the U.S. consumer (outdoor and lawn) sector, this effort may boost profitability for the indoor gardening and hydroponic segments. In the end, management expects Hawthorne to expand by 40% or more this year, compared to its 60% growth rate last year.

The finest of both worlds is Scotts Miracle-Gro.

Scotts’ total value seems muddled due to poor growth and high margins in its main U.S. consumer sector, as well as strong growth and low profits in its Hawthorne segment. However, the two different business lines work well together, since income generated by its core sector helps Hawthorne expand. In some ways, this reminds me of eBay (NASDAQ:EBAY) before the separation of its high-growth PayPal (NASDAQ:PYPL) business, and it may presage the potential success of a Scotts Miracle-Gro investment. Gro at a reduced price today.

While a spinoff of Scotts’ Hawthorne business is unlikely, the company’s current P/E of 14 and the nascent sector’s potential have me agreeing with CEO Hagedorn on the stock’s optimistic outlook.

The best long shot stocks 2021 is a cannabis company that says its shares are too cheap. This company believes it has a chance to be the best long-shot stock of 2021.

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