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Why Scotts Miracle-Gro Sprouted On Tuesday After Issuing Lower Guidance

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Why Scotts Miracle-Gro Sprouted On Tuesday After Issuing Lower Guidance
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In this day and age of algorithmic trading, there are many mind-boggling moves in the equities markets. None more so than the rip-your-face-off rally in shares of Scotts Miracle-Gro Co (NYSE: SMG) in Tuesday's session.

For a quick recap, the stock opened $2.00 lower, immediately bottomed and rallied $8.00 to end the day with nearly a $6.00 gain to close at $89.83.

Before the open on Tuesday, the company issued lower guidance for FY 2017 EPS to $4.00–$4.20 from $4.10–$4.30 versus an estimated $4.19 along with cutting sales growth from 6–7 percent to 3–4 percent.

As usual, algos being algos, tagged the stock in pre-market trading under $80.00, with a low-volume print at $79.75 compared to its previous day close of $83.86. Most likely, other short-term traders, who were looking to short the issue, along with long-term holders of the issue hitting the panic button and had their finger on the sell button on the opening print.

Putting It All In Context

However, what the machines, aggressive traders and long-term holders may not have been cognizant of was the presentation the company was making at the William Blair Growth conference on Tuesday where the management elaborated on the morning's dire news.

During that presentation, management explained that the primary reason for the lower guidance was from their underperforming business in their old core consumer business. Also, the international segment of the company was growing so slow, they recently spun off all gardening products, etc.

Management Talks Marijuana Segment Hawthorne Gardening

More importantly, management announced Hawthorne Gardening (marijuana segment of company that is the maker of hydroponic components) is now large enough to that they intend to roll it out as its own segment in company's financials starting in the fourth quarter. With the continued increase in the legalization of marijuana along the steady core of recreational users, more and more product will be needed to stash dispensary shelves.

This concept has been mentioned in the past, but now concretely has slapped a date on it.

In fact, CEO Jim Hagedorn stated that the company's "hydroponic portfolio" (which is effectively Hawthorne) is actually strengthening. Entering June, Hawthorne is growing at 17 percent on a year-over-year basis, which is up from the 13-percent growth reported in Q1 (ended April 1, 2017).

Hagedorn also stated the combination of a Hawthorn acquisition along with another is expected to be immediately accretive to earnings, adding 5-7 cents to earnings per share on an annualized basis. Just as Wall Street demands growth for future price appreciation, the company is planting the seeds to meet those expectations. Scotts Miracle-Gro just completed a multi-year transformation which it believes will put it in a position of leadership when the smoke clears on the marijuana industry ... or should I say, rises.

Repurchase Activity And Incentive Plans

In addition, it was announced Scotts Miracle-Gro has increased its share repurchase activity in recent weeks and expects to repurchase $250 million to $275 million of its shares on a full-year-basis. The program is being ramped up while the stock has retreated from its all-time-high that was made in December at $98.82. Buying into weakness as opposed to strength, just like long-term value investors such as Warren Buffett.

In a further testament to management's faith in the future of the company, the company has altered its management incentive plans to focus on cash flow guidance they provided at the end of the presentation. In the words of the company's upper-management, "putting their money where their mouth is."

Subsequent Moves In The Market

The stock has relinquished some of Tuesday's gains, but is still more closer to Tuesday's close ($89.83), than Tuesday's washout low ($81.48). Only time will tell if profits will bloom for the company off these forecasts or be dead on the vine.

Steve Strazza was a contributor to this article.

Related Links:

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New Frontier Data CEO On Collective Effort Behind Marijuana Legalization: Coming Together Helps The Whole Cannabis Industry

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Image Credit: Scotts Miracle-Gro HQ, Marysville, Wiki Historian N OH of English Wikipedia [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons

Posted-In: Hawthorne Gardening Jim HagedornGuidance Technicals Buybacks Intraday Update Movers Trading Ideas Best of Benzinga

 

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