With 29 organic garden centers, across 11 states, GrowGeneration (GRWG) is the largest hydroponic equipment supplier in the United States. GRWG is a "picks-and-shovels" cannabis stock, meeting cannabis growers' hydroponic and organic gardening needs. The company also sells propagation supplies, pest controls, environmental controllers, and ventilation solutions. GRWG also offers greenhouse design solutions and harvesting solutions. It also operates GrowGen.Pro, an online e-commerce store to serve its customers.
GRWG is one of the best-performing stocks in 2020 whose ascent began after its record revenue and income growth in the second quarter ended June 2020. Revenue increased 123% year-over-year to $43.5 million as online business sales jumped 149% during the quarter. Same-store sales surged 49% in the same period despite lockdowns affecting the first half of the quarter. EPS for the quarter came in at $0.06, doubling year-over-year.
With the robust growth in its operating results, the stock has picked huge momentum and gained 331% year-to-date. However, uncertainty related to the stock’s continued momentum based on several factors has made our proprietary rating system rate it as “Neutral.”
Here is how our proprietary POWR Ratings system evaluates GRWG:
Trade Grade: B
GRWG is currently trading way above its 50-day and 200-day moving averages of $14.67 and $7.72, respectively, indicating that the stock is in an uptrend. The stock’s 144.4% return over the past three months reflects a solid short-term bullishness.
GRWG’s commercial division generated over $9 million in revenues in the second quarter, an increase of 142% year-over-year, and added 167 new commercial customer accounts during the quarter compared to its preceding quarter. The company now services over 700 commercial accounts.
Buy & Hold Grade: C
In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, GRWG’s positioning is not favorable. The stock is currently trading 22.8% below its 52-week high of $22.88.
Looking at the past three years, the stock has grown more than 844% due to its aggressive capital expenditures and steady growth in the user base. The top-line grew at a CAGR of 122.5% in the same period. Moreover, GRWG was added to the Russell 3000 index in June this year.
However, GRWG has opted for inorganic expansion and the company’s mergers and acquisitions pipeline has been most active since inception. It plans to expand to 50 stores in 15 states by the end of next year and mergers will be key to achieving this goal. The company has recently announced its acquisition of Hydroponics Depot, Phoenix's largest indoor and outdoor garden center. The company also purchased the assets of H2O Hydroponics LLC., located in West Lansing, MI, in June 2020, followed by the purchase of Emerald City Garden, located in Concord, CA, in August 2020.
Peer Grade: D
GRWG is currently ranked #47 out of 68 stocks in the Home Improvement & Goods industry. Other popular stocks in the group are Home Depot, Inc. (HD), Lowe's Companies, Inc. (LOW), and Sherwin-Williams Company (SHW).
GRWG comfortably beat the year-to-date gains of the three industry participants. HD, LOW, and SHW returned 33.8%, 46.3%, and 21.2%, respectively, over this period.
Industry Rank: A
The StockNews.com Home Improvement & Goods industry is currently ranked #1 out of the 123 industries. The companies in this industry sell building supplies, lumber, hardware, home improvement products, home furnishings, goods & accessories, and home-related services.
The pandemic witnessed an accelerated demand for home remodeling, repair, and new homebuilding. People either transformed their existing space into the home office or developed new hobbies like gardening while they were stuck at home.
Overall POWR Rating: C (Neutral)
Overall, GRWG is rated a “Neutral,” as its impressive quarterly performance and solid price momentum is offset by its premium valuation as determined by the four components of our overall POWR Rating.
Bottom Line
The stock has soared so far this year, despite some profit-taking. The pandemic has created a strong demand in organic gardening practices as Americans have been at home and growing their plants, including marijuana. GRWG was able to meet the demand for nutrients, additives, and soils, and increase the number of customers. Moreover, with the presidential election approaching, the sector could take off if Joe Biden elected as that could pave the way to legalization and loosen regulations. Hence, the stock is well-positioned for long-term growth.
However, the stock is perceived to be highly overvalued as it commands a forward P/E ratio of 121.8 compared to the sector’s median value of 25.9. Moreover, 53.6% of GRWG stock is in the hands of institutional investors. Hence, a slight profit-booking by these institutions can erase substantial gains in the future.
Analyst sentiment, which gives a good sense of a stock’s future price movement, is moderate for GRWG. The market expects EPS to rise by 20% per annum for the next five years. This outlook should keep GRWG’s price momentum alive in the long run.
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GRWG shares rose $0.17 (+0.92%) in after-hours trading Tuesday. Year-to-date, GRWG has gained 349.02%, versus a 10.34% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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