Wells Fargo Rates Four Cannabis Stocks – Scotts Miracle-Gro Is 'Flashing Green' As Buy Opportunity

Wells Fargo’s WFC analyst Chris Carey initiated coverage of four stocks in the cannabis space in his latest analyst note. The cannabis stocks on Carey’s radar include Canopy Growth CGC, Scotts Miracle-Gro Co. SMG, Hydrofarm Holdings Group Inc. HYFM and GrowGeneration Corp. GRWG.

Scotts Miracle-Gro, which produces consumer lawn, garden and pest control products also utilized in the marijuana space, owns the Hawthorne line of hydroponic equipment for growing cannabis. Miracle-Gro received “the most bullish comments in a sign of Wall Street’s growing interest in the sector,” wrote MarketWatch.

Carey assigned an Overweight rating to Scotts Miracle-Gro, an Underweight to Canopy Growth, while GrowGeneration and Hydrofarm both got Equal Weight.

Year-To-Date Performance

While year-to-date, SPDR S&P 500 ETF Trust SPY gained some 27.02%, here is how these stocks performed:

• GrowGen lost 59.71%;
• Canopy Growth is down 59.15%;
• Hydrofarm shares are 49.51% lower than at the beginning of the year;
• Scotts Miracle-Gro lost the least or 26.39%.

Scotts Miracle-Gro – ‘Flashing Green’

Carey noted that Miracle-Gro is well-positioned in the broader garden center space as it has a notable presence at large retail companies such as Home Depot HD and Lowe’s LOW.  

The analyst set a price target on Miracle-Gro’s stock of $180 per share and added that it is “flashing green” as an investment opportunity.

“We see opportunity: a stock well off its April highs, a discount to peers, and fundamental opportunity – leader in lawn/garden and hydroponics – still ahead,” Carey said. “Strong operators can take advantage of market dislocations, and we think SMG can re-run its FY18 playbook to consolidate more share (key driver of hydroponics growth).”

Price Action

Scotts Miracle-Gro’s shares were trading 6.93% higher at $148.44 per share at the time of writing Tuesday late morning.

GrowGeneration – The Top Hydroponic Retailer

The Wells Fargo analyst set a price target of $18 per share on GrowGen’s stock, calling it “the top hydroponic retailer in North America” with this year's revenue four times larger than two years ago. Carey pointed out that the stock is valued at a discount to the growing retail sector.

“The runway looks attractive, with a strategy to increase store count +60% by end-2023; internal initiatives (e-commerce, private label); and continued momentum of U.S. cannabis, a key driver of hydroponic category demand,” Carey noted.

Price Action

GrowGen’s shares traded 2.02% higher at $15.67 per share

Hydrofarm Holdings – ‘Pure Player’

Carey set the price target on this wholesaler, distributor, and manufacturer of hydroponic equipment and supplier at $33 per share, calling it a “pure player” in the sector.

“HYFM generates all revenue and profit in hydroponics, one of few federally legal ways to play secular U.S. cannabis growth — that’s a long-term positive,” he wrote. “However, during bouts of market volatility, as is happening now on the U.S. west coast, this means HYFM is exposed. “

Price Action

Hydrofarm’s shares were trading 1.59% higher at $29.46 per share.

Canopy Growth – ‘Still Overvalued’

Carey placed a price target of $8 per share on the Canadian cannabis giant, Canopy Growth. Even though the stock lost 59% year-to-date, he said it “still looks overvalued.”

 “We think it’ll be tough to hit ‘breakeven’ revenue near-term barring a change in U.S. federal cannabis laws, and are below consensus,” Carey opined.

Photo: Courtesy of Rick Proctor on Unsplash