Your Special Garden. Grow Generation.

Six in California, five in Colorado, four in Michigan, four more in Oklahoma, one in Washington, and Oregon, and Florida, four more in Maine, and online–and now in Arizona, with the brand new acquisition of Hydroponic Depot, along with the state’s pending Prop 207 calling for legalization. All right then. It seems Grow Generation’s on the march. Specialty cultivators celebrate. Traders too.

Corporate growth requires work and work grows exhausting and the longer that exercise goes on the more attractive things become. That’s Grow Generation now. GRWG graced the Wall Street red carpet a couple months back. Cramer raved, shares rose hard, and pulled back nasty-like amid the wider market shudder. Do you enjoy share prices that spike on a regular basis–tradable ones? We do. Increasingly we like GRWG long-term as well. This Denver-based specialty retailer is also thinking long term.

Let’s be clear. GRWG is growth. Value investors need read no further. On the other hand, growth investors should already know. Fast growers are routinely expensive, while hyper-growth is even more so. Hold-up. On every valuation metric GRWG is very expensive, with the very important exception of its’ forward P/E. Like Home Depot? HD currently sells for a 24.3 forward price-to-earnings multiple. Guess what? GRWG is only twice that, at 55.8. Home Depot’s hyper-growth phase ended yonks ago. GRWG’s just now reached explosive growth. Growth is what investing’s all about. If you’re not willing to consider that, take up knitting.

“Too expensive” you claim? Not when you realize that GRWG’s earnings are estimated to grow by 198% over the next twelve months. You need a seatbelt for growth like that. Meanwhile HD’s is estimated to grow 10.7%, or a mere 5% that of GRWG’s. Do that math. If estimates work out, that’s a bargain. Shareholders will have paid 2x HD’s FP/E for a company providing 18.5x the earnings growth. Again, 2X HD’s multiple for 18.5X the earnings. And the top line? GRWG’s sales expanded 147% over the past year, and 131.3% every year over the past five. Meanwhile, the rightly beloved Home Depot has grown sales at 5.8% a year over the past five. Both value and growth have their place. Yet market risk threatens all. If you’re shouldering that, you should be paid.

Snugged-in at the feet of the front range, Denver is busy pioneering the modern cannabis industry, forty years after Amsterdam. Here is where you’ll find Grow Generation, along with many retail cannabis businesses creating the cutting edge of the expanding weed industry. Think “concentrates” like “Shatter.” The consumer offerings are endless, sophisticated, and pricey. You’ve gotta wonder how many more budget-pressured states and municipalities are increasingly thinking weed-wise. Consider Coronavirus-related hits to tax revenue due to closed bars/restaurants, curtailed travel, recreation, and other hospitality. The COVID age lies like an enormous weight atop tax revenue globally.

Grow Generation is indeed a small cap, very small. As such it is not our first investing candidate. Yet this $761.9M retail chain currently sits in our trend-driven portfolio. Why?

Back in the election of 2016 weed was as much on the ballot as the Oval Office. And what happened? Eight out of nine states passed legalization ballot measures. That result ranked as a continuation of a longer green wave. Some say it’s inevitable. Feelings, opinions, experiences, and generations come and go. Currently 33 states have legalized medical marihuana, with 11 having gone all the way to include recreational. Last year our northern neighbor legalized the entire industry.

This November will bring additional legalization measures in 5 more U.S. states. As alcohol sales appear to be in decline, and state and local governments face black budget holes due to COVID, the pressure to legalize seems set to only increase. Will taxing authorities sit quietly as neighboring jurisdictions rake in these tax dollars? Clue. Think gambling legalization.

Meanwhile, the disconnect between state and federal law is now glaring. This year’s election may resolve that. Federal decriminalization would allow the industry to use banks. Huge. In reality, prohibition has proved a costly failure in every case. Think alcohol. Think income from the alcohol tax. Yet again the prohibition effort is fully out of step with growing public opinion, and action. Sadly and ironically, the endless and utterly failed federal war on weed is now being waged in far more states in which it’s now legal, in some form, rather than not. Like it or not, anyone with eyes can see where this is going. How much more so in the job-slaughtering wake of COVID?

With the addition of Phoenix-based Hydroponic Depot, GRWG now features 29 retail outlets over 11 states, coast to coast. The current Arizona market is estimated at $700 million, and set to potentially triple if Prop 207 for legalization passes this November. GRWG is a one-stop shop regardless of herb, veggie, or plant. We’ve traded it relentlessly over the past two months. Really. It’s been good for $1.00-$1.50 a share each trade.

What’s Grow Generation up to? GRWG’s the largest one-stop specialty retailer for both the indoor and outdoor grower. It’s the go-to cultivation source for the exacting needs of performance cultivators. Their 184 employees–right, 184, will fill your need for anything from complete commercial grow systems to the tiniest supplemental mineral additive. “Lights” you say? What kind? How many? Their specialties include hydroponics, aquaponics, organics, nutrients, mediums, automation, and much much more. Buy online and pick up in-store, or have it shipped.

GRWG has pulled back from a strong spike on 8-19-20 when shares set a 52wk high of $22.88. GRWG yet soars more than 100% over it’s nicely-rising 200-day simple moving average. The chart is a thing of beauty. Revenue for this niche retailer is indeed piling up like some mad Colorado snow storm. Yet when one digs a bit more one stark truth becomes clear. GRWG exists on a Net Profit Margin of 0.84%, and a Return on Equity(ROE) of 1.9%. Those are grocery store margins. For example, again, Home Depot(HD) has a Net Profit Margin of 9.9%, or 12X that of GRWG. Oops. What else? GRWG has almost zero debt. Nice–right? Yet, is that smart for any expanding company at a time when money is dirt cheap?

Grow Generation COO Tony Sullivan. “We’re excited to add Hydroponic Depot to our growing portfolio, with year to date sales in excess of $5 million and year over year growth at 50 percent.” Denver, October 12, 2020. A rather staid corporate photo for a grow supply outfit.

Both professional and amature cultivators shop Grow Generation–legal, illegal, personal, and commercial. Grow Generation is like an urban Tractor Supply only with hydroponics and lighting for the lone indoor enthusiast, or sprawling commercial operator. And as most probably assume, the COVID crisis affects even this business, good and bad. How? Trends.

The healthy lifestyle mega-trend takes many forms and healthy eating is leading that charge. Think fresh. The restaurant business has for years been focusing on the refined diets and tastes of the health-conscious, or specialty cuisine trade. Example? “Farm-to-table” fresh long ago became a draw, and restaurants across the country are sourcing fresh, organic, and local. Both smaller restaurants, along with mighty Chipotle, increasingly demand the best, organic, and certified. Specialized cultivators are filling that need. But COVID’s closed most restaurants. Not good. Yet this last summer saw a boom in home gardening. Meanwhile, the cannabis industry is surviving, as such retail business is more viable amid social distancing.

Technical analysis is a direct look inside the price-action. GRWG is clearly enjoying a strong up-trend as demonstrated by the sharply-rising 50-Day and 200-Day simple moving averages(yellow and electric-blue lines.) The on-balance-volume remains strong, with more volume on up days than down(not shown.) Simultaneously, up momentum is waning, as seen in the stochastic oscillator value line at bottom(yellow line, top study.) The MACD at bottom has just completed a bullish cross-over(SJChart.)

And what’s the chart say? The horizontally-displayed stochastic oscillator study(3 line) clearly offered the SELL signal near GRWG’s peak in mid-August. The vertical line indicates the oscillator peaking above 75, high in the “over-bought” range. Ever since, shares have chopped and wound around the 21-day SMA(red line.) Price support appears at $17.40 and again at $16.38. We tend to like GRWG much better just below $15.00, where support again comes in at $14.74. That trade’s worked for us.

COVID has brought earnings estimates down for the vast majority of companies. Of course tech’s been the standout exception. Yet living strictly on tech is unwise. But who want’s mainline retail now? Retail’s best have run too far–Costco, Target, Home Depot. Grow Generation’s a niche retailer with an audience, an audience perhaps set to grow. We like it below $15.00. In fact we own it now. If you’re willing to pay up for serious growth potential, as a speculative play, GRWG is precisely that.

As always, good luck and good investing.

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