Wells Fargo analyst Chris Carey on Thursday initiated coverage of four cannabis stocks, with Scotts Miracle-Gro Co. drawing the most bullish comments, in a sign of Wall Street’s growing interest in the sector.
Wells Fargo assigned an overweight rating to Scotts Miracle-Gro
the maker of fertilizer and owner of the Hawthorne line of hydroponic equipment for growing cannabis. He rated GrowGeneration Corp.
and Hydrofarm Holdings Group Inc.
as equal weight and Canopy Growth Corp.
Carey set a price target of $180 a share for Scotts Miracle-Gro and said the stock is “flashing green” as a buying opportunity. The stock has dropped 30.3% in 2021, compared with a rise of 22.3% by the S&P 500 index.
“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 wrote in a research note.
While recent volatility in the hydroponic volatility remains an “elephant in the room”, the U.S. West coast cannabis market is working through oversupply, causing
hydroponic market turbulence against already record year-ago comps, he 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),” he wrote.
Unlike its peers, Scotts Miracle-Gro is also well established in the broader garden sector with a major presence at major retailers such as Home Depot Inc. and Lowe’s Cos. Inc.
Carey set a price target of $18 a share on GrowGeneration, which he described as “the top hydroponic retailer in N. America” with 2021 revenue growth greater than four times its level in 2019. It’s also valued at a discount to the fast-growth retail sector.
GrowGeneration shares are down about 61.8% this year, compared with a loss of 24.5% by the Cannabis ETF
“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 wrote.
Meanwhile, Hydrofarm Holdings, a wholesaler, distributor, and manufacturer of hydroponic equipment and supplies in North America, drew a price target of $33 a share. as a “pure play” in the space, Carey said
Hydrofarm Holdings shares are down 44.9% in 2021.
“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. “
Cannabis retailer and manufacturer Canopy Growth Corp drew an $8 price target.
Carey said the stock “still looks overvalued” despite its roughly 59% slide this year.
“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,” he wrote.