Contrarian Value Ideas

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>>> The Scotts Miracle-Gro Company (NYSE:SMG)

https://finance.yahoo.com/news/12-best-farmland-agriculture-stocks-140403079.html

Number of Hedge Fund Holders: 30

The Scotts Miracle-Gro Company (NYSE:SMG) is an Ohio-based company that serves the agricultural industry through products, like organic products for gardeners, pesticides, hydroponic nutrients, and more. The company sells its products under various brands, including EZ Seed, Miracle-Gro Organic Choice, etc. The Scotts Miracle-Gro Company (NYSE:SMG) has a market capitalization of $4.103 billion as of March 21.

On March 20, The Scotts Miracle-Gro Company’s (NYSE:SMG) subsidiary, Hawthorne Gardening Company, announced that it entered into a strategic partnership with BFG Supply, under which the company’s proprietary Signature brand cultivation supplies and solutions will be distributed by BFG.

As of the fourth quarter of 2023, 30 hedge funds have a stake worth $169.391 million in The Scotts Miracle-Gro Company (NYSE:SMG). Schonfeld Strategic Advisors has increased its stake by 42% in the company in Q4, 2023, to 444,336 shares worth $28.326 million, making the firm the largest shareholder of the company.

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.”

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