The Top Ancillary Cannabis Stock for Sustainable Growth
As December 2023 approaches, investors are increasingly turning their attention towards ancillary cannabis stocks, a sector that has been gaining momentum in the backdrop of the expanding U.S. cannabis industry. Recent statistics reveal a compelling growth story: the U.S. cannabis market is projected to exceed $30 billion by the end of 2023, marking a significant leap from previous years. This growth is not just confined to direct cannabis producers. Still, it extends to ancillary companies that provide essential services and products to the cannabis industry, such as technology solutions, equipment, and professional services. These ancillary players are crucial in supporting the industry’s infrastructure without being involved in the cultivation or sale of cannabis itself.
Trading Top Ancillary Pot Stocks
The appeal of ancillary cannabis stocks lies in their unique position within the market. Unlike companies that grow or sell cannabis, ancillary firms are often less exposed to the stringent regulatory challenges that direct cannabis businesses face. This aspect makes them particularly attractive for swing traders, who capitalize on short-term market movements. Swing traders in this sector benefit from the volatility and rapid growth potential, using technical analysis and market trends to make swift, profitable trades. However, the sector’s rapid growth and evolving legal landscape offer appealing opportunities for long-term investors.
For long-term traders, ancillary cannabis stocks present a more stable investment route within the burgeoning cannabis market. These stocks offer exposure to the industry’s growth while mitigating some risks associated with direct cannabis operations. Long-term investors are particularly drawn to companies with strong fundamentals, such as robust earnings growth, solid management teams, and clear strategic advantages. As the U.S. cannabis industry matures, these ancillary businesses are expected to play a pivotal role, making them an intriguing option for investors looking to diversify their portfolios in December 2023 and beyond.
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Investor’s Guide: Essential Ancillary Cannabis Stocks for December 2023
- GrowGeneration Corp. (NASDAQ: GRWG)
- The Scotts Miracle-Gro Company (NASDAQ: SMG)
- Hydrofarm Holdings Group, Inc. (NASDAQ: HYFM)
GrowGeneration Corp.
GrowGen is the owner and manager of a retail organic and hydroponic growing facility. GrowGen currently has 62 locations in 18 states. In addition, GrowGen also operates a cultivator superstore at growgeneration.com. In general, the company provides and sells a wide range of products for home and commercial growers, including advanced indoor and outdoor hydroponic equipment, organic soils and nutrients, and cutting-edge lighting.
Third Quarter 2023 Highlights
The press release for the third quarter of 2023 presents a mixed financial performance. The company reported net sales of $55.7 million. This figure shows a 13% decrease compared to the previous quarter. Regarding comparable store sales, there was a 14.4% decrease compared to the prior year. Despite these declines, the company saw an improvement in its gross profit margin. It increased by 320 basis points to reach 29.1%. This increase indicates a more efficient cost management compared to the previous year.
However, the company still faced a net loss. The net loss amounted to $7.3 million. This is slightly higher than the net loss of $7.2 million reported in the previous year. In terms of Adjusted EBITDA, a measure of profitability, the company reported a loss of $0.9 million. Despite being a loss, this represents an improvement of $1.8 million compared to 2022. This improvement suggests that the company is managing its expenses better.
From a cash flow perspective, the company appears to be relatively stable. It reported that year-to-date operations had generated $2.8 million in cash flow. This is a positive sign, indicating that the business is generating cash through its operations. Additionally, the company’s financial stability is evident in its reserves. It reported having $66.6 million in cash, cash equivalents, and marketable securities. This amount provides a cushion for the company to navigate challenging market conditions.
Looking ahead, the company is maintaining its full-year guidance for 2023. It expects revenue to be between $220 million and $225 million. Regarding Adjusted EBITDA, the company anticipates a loss of $4 million to $6 million. This guidance suggests that the company anticipates continuing challenges but also indicates a degree of confidence in its ability to manage these challenges effectively.
GRWG Stock Performance
GRWG stock closed at $2.7703 on November 29th, up 49.46% in the last month of trading. In addition, GRWG stock has a 52-week range of $1.77-$8.63 and is down 29.08% year to date. According to analysts at CNN Business, GRWG stock has a 12-month median price target of $4.34. In this case, this represents a 56.40% increase from its last trading price of $2.7703.
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The Scotts Miracle-Gro Company
Scotts Miracle-Gro, the world’s largest branded consumer lawn and garden product manufacturer, has joined the cannabis industry. Hawthorne Gardening, a corporation-owned subsidiary, provides hydroponic equipment, lighting, and fertilizers for cannabis production. In January, Scotts added True Liberty Bags and Luxx Lights to the Hawthorne range. As a result of the acquisition, Hawthorne will be able to expand its already impressive range of lighting products. The decrease in profit has no bearing on Hawthorne’s predicted year-end results.
Highlights for Fiscal 2023 Full-Year
The Scotts Miracle-Gro Company announced its fourth quarter and fiscal year results for 2023, showing mixed outcomes. For the full year, the company achieved net sales of $3.55 billion, aligning with its guidance. It reported a significant improvement in free cash flow, reaching $438 million, a $681 million increase year over year. The company remains confident in achieving $1 billion in free cash flow over two years through Fiscal 2024.
Project Springboard’s cost savings contributed to a full-year non-GAAP adjusted EBITDA of $447 million. However, the company faced a full-year GAAP loss per share of $6.79. Adjusted non-GAAP EPS was $1.21. In fiscal 2023, sales declined by 10 percent. The GAAP loss per share was $6.79. Non-GAAP adjusted earnings were $1.21 per diluted share. The financial outlook for fiscal 2024 includes progress on margin recovery, adjusting for a higher share count, effective tax rate, and average cost of borrowing versus fiscal 2023.
Outlook
Chairman and CEO Jim Hagedorn reflected on the stabilization of the business and progress made in several areas. These include cost savings, free cash flow generation, and debt reduction. The company aims for margin recovery, growth in the consumer business, and solutions for Hawthorne. An operating plan for fiscal 2024 focuses on strong retailer engagement, cost control, free cash flow generation, and debt paydown. The company has also upgraded its executive and senior leadership teams.
For the fourth quarter of 2023, company-wide sales decreased by 24 percent to $374.5 million. U.S. Consumer segment sales declined by 33 percent. Hawthorne segment sales decreased by 11 percent. Both GAAP and non-GAAP adjusted gross margin rates were negative due to unfavorable fixed cost leverage and lower net pricing, partially offset by distribution savings from Project Springboard.
The fourth quarter saw a GAAP net loss of $468.4 million, or $8.33 per share, compared with a prior year loss of $220.1 million. Non-GAAP adjusted loss was $155.4 million, or $2.77 per share. For the full fiscal year, U.S. Consumer segment sales declined by 3 percent, and Hawthorne segment sales decreased by 35 percent. The GAAP gross margin rate for the full year was 18.5 percent, and the non-GAAP adjusted rate was 23.7 percent. SG&A decreased by 10 percent from 2022, reflecting cost savings from Project Springboard.
SMG Stock Performance
SMG stock closed at $56.40 on November 29th, up 25.16% in the past month. In this case, the stock has a 52-week price range of $43.67-$88.61 and is up 16.15% year to date.
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Hydrofarm Holdings Group, Inc.
In addition to a wide range of in-house and creatively branded products, Hydrofarm is a top independent manufacturer and distributor of branded hydroponics supplies and equipment for controlled environment agriculture, including grow lights, climate control systems, growing media, and nutrients. Hydrofarm has been assisting farmers in growing more profitably and easily for more than 40 years. The company’s mission is to supply goods that improve the standard, efficiency, reliability, and speed of growing activities for farmers, cultivators, and growers.
Third Quarter 2023 Highlights
In the third quarter of 2023, the company reported a decrease in net sales, dropping to $54.2 million from $74.2 million in the previous year. Gross profit also saw a decline, falling to $3.3 million from $5.9 million. This decrease in gross profit led to a reduction in the gross profit margin, which went down to 6.1% of net sales from 7.9%.
However, there was an increase in adjusted gross profit, which rose to $12.5 million from $7.8 million. The adjusted gross profit margin also saw an improvement, increasing to 23.0% of net sales compared to the previous 10.5%. Despite these gains, the company experienced a net loss of $19.9 million, although this was an improvement from the net loss of $23.5 million reported in the same period last year.
Adjusted EBITDA showed positive movement, increasing to $0.5 million from a negative $9.0 million. This improvement suggests better operational efficiency. Inventory charges and accounts receivable reserves impacted the quarter’s results. Despite these challenges, the company managed to generate cash from operating activities amounting to $7.7 million and achieved a free cash flow of $6.9 million.
The company initiated a second phase of its restructuring plan to enhance efficiency and cost savings further. This phase includes the consolidation of U.S. manufacturing facilities. This restructuring aims to streamline operations and generate additional cost savings. This move indicates the company’s ongoing efforts to optimize its operations and improve financial performance.
HYFM Stock Performance
HYFM stock closed at $0.8805 on November 29th, down 13.60% in the last month of trading. At present, HYFM stock has a 52-week price range of $0.6720-$3.25, down 42.59% year to date.
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Ancillary Stocks Poised for Success in December 2023
In conclusion, investing in ancillary cannabis stocks presents distinct opportunities for both long-term and short-term investors, each requiring different strategies and considerations. For long-term investors, the focus is on these companies’ underlying health and growth potential. Such investors should look for firms with strong fundamentals, including robust revenue growth, innovative product lines, and strategic partnerships within the cannabis industry. The long-term approach benefits from the industry’s overall growth trajectory and reduced exposure to the legal and regulatory risks faced by direct cannabis producers. However, patience and a thorough understanding of the sector’s dynamics are crucial, as the cannabis market is still evolving and can be affected by regulatory changes and market trends.
Short-term traders, on the other hand, can leverage the volatility inherent in the ancillary cannabis sector to their advantage. Using technical analysis, these traders can identify entry and exit points, capitalizing on short-term price movements. These traders need to stay abreast of market news and trends, as these can have immediate impacts on stock prices. However, given the volatility and risks associated with the cannabis industry, proper risk management is essential. This includes setting stop-loss orders, diversifying across different stocks, and only allocating a portion of one’s investment capital to these high-risk trades. By combining technical analysis with disciplined risk management, short-term traders can aim to maximize their gains while mitigating the potential for significant losses. Whether opting for a long-term hold strategy or engaging in short-term trading, investors in ancillary cannabis stocks must remain adaptable and informed to navigate this dynamic and rapidly evolving industry.
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