Why This Marijuana Stock Plunged 15.6% in January

MarketsMotley Fool

What happened

Shares of Scotts Miracle-Gro (NYSE: SMG) plummeted 15.6% in January, according to data from S&P Global Market Intelligence. The stock of the lawn- and garden-care company, which is now a player in the marijuana space, is down 16.5% in 2018 through Feb. 13. It's returned a negative-1.2% for the one-year period through the same date.

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For some context, the S&P 500 returned 5.7% in January, is essentially flat for 2018, and has returned 17.3% over the past year, through Feb. 13.

So what

Scotts Miracle-Gro stock's poor performance in January was due to the company's release of its first-quarter results on Jan. 30. Results fell short of Wall Street's expectations and reflected a slowdown in the company's subsidiary that sells to the cannabis industry. Following the release, shares plunged to a closing loss of 14.2% that day.

For the quarter, Scotts reported a year-over-year revenue increase of 7%, a loss from continuing operations of $0.35 per share on a GAAP basis, and a loss of $1.08 per share on an adjusted basis, as my colleague Jason Hall noted at the time. A loss was expected, as the seasonal nature of the company's business means that it nearly always reports a loss in the first quarter. The culprit was the size of the adjusted loss, which was considerably larger than the $0.92 loss-per-share Wall Street was expecting.

Moreover, investors were no doubt concerned about a slowdown in the company's Hawthorne Gardening Co. subsidiary, which has been driving Scott's growth in recent years due to its focus on the fast-growing marijuana industry. Hawthorne posted a year-over-year revenue increase of 20%, but this was entirely due to acquisitions, as organic growth was flat.

Now what

When Scotts Miracle-Gro reports its quarterly results, investors should remain focused on Hawthorne's results. While a temporary slowdown in organic growth shouldn't be reason for concern, a more protracted slowdown would be worrisome as it could indicate that investors might not be able to count on Hawthorne driving future growth.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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