I started following GrowGeneration in late 2016 when it went public. I was intrigued by several factors that set it apart from other newly public companies trading on the OTC, including that it had revenue and that it had gone public through the „S-1 filing” approach rather than through a reverse-merger. Additionally, it sounded like a smart business model.
The stock has had a fantastic 2019, substantially outperforming the Global Cannabis Stock Index by rising 124% compared to the index gain of just 1.5%:
The emergence from a period of poor performance during 2018 began in May, and the stock has advanced sharply since then. I shared with my subscribers at 420 Investor in a post entitled „GrowGeneration’s Solid Start to 2019” that was later shared in the June edition of the 420 Investor Newsletter about my bullish outlook, concluding a year-end objective for the stock, then trading at 3.025, was $6.00-6.60. With the recent close above $5, we are well along that path, and I continue to expect it to obtain that goal.
GrowGen went public after beginning operations in 2014 when it acquired a chain of hydroponic stores serving the Colorado cannabis industry. It has expanded now to several additional states, including California, Maine, Michigan, Nevada, New Hampshire, Oklahoma, Rhode Island and Washington. The company has been expanding while also rationalizing its Colorado footprint, with smart acquisitions as well as new store openings in new markets.
One thing that I think supports investment in the stock has been the involvement of three cannabis-focused institutional investors, including Gotham Green Partners, Merida Capital and Navy Capital, each of who have invested in prior capital raises as well as the most recent one. In that last financing, additional institutional investor JW Asset participated, giving the company four backers.
2018 was a challenging year for the company, with growth falling short of expectations, as described in the newsletter linked above. In addition to some fundamental challenges, there were a few technical issues that led to a disappointing year for investors, as the stock lost 44% of its value (note that the Global Cannabis Stock Index declined 55% in 2018, so GrowGeneration actually performed better than the market). The stock had consolidated consolidated a 71% gain in 2017 during the year, going out near an all-time high at the time as the market ran up in anticipation of California legalizing it. Despite the early pressure on cannabis stocks in 2018, the stock exploded higher as a newsletter service recommended the relatively tight-float stock, soaring to as high as 20 before ending the year at 2.25.
For those interested in learning more about this and the history of the company, we published an interview summary and provided the full audio recording with President Michael Salaman in mid-July.
Recent Operational Performance
The linked newsletter article describes the financial performance during Q1, and, updating that information, Q2 performance was solid, with the company generating sales of $19.5 million, which represented growth of 172%. Impressively, same-store-sales growth accelerated 23% to $6.2 million. Some new markets and the addition of e-commerce as well as new-store openings and acquisitions contributed 68% of sales. Gross profit margins were a solid 30%. The company reported an operating margin of 24%, with net income of $1.06 million and adjusted EBITDA of $2.44 million or $0.07 per diluted share.
The company increased its guidance for 2019 to revenue of $65-70 million and adjusted EBITDA to $0.14-.18 per year. With 42.1 million shares on a fully-diluted basis and a close of $5.03 on August 23rd, the market cap is $212 million, suggesting the stock is trading at a multiple of 3.1X 2019 estimated sales. I continue to see my year-end objective of $6.00-6.60 as realistic, suggesting 25% potential upside over the next four months.
While I expect substantial improvement in the stock price by year-end, I have recently reduced my exposure in my longer-term model portfolios at 420 Investor, though they are still above both the average position size in the model portfolios as well as substantially higher weightings than they are in the Global Cannabis Stock Index. I have learned to take profits after following this market for six years! That aside, I see more lucrative near-term and even possibly longer-term opportunities and believe a reduced exposure is warranted. If the company continues to execute, I think it could perform very well over the next several years. One thing I really like is that it is doing an increasing amount of business with leading multi-state operators (MSOs), so investors can leverage growth in the space without picking winners among the operators. I expect the company to uplist to the NASDAQ as well, which would be a substantial positive driver. This leaves me in the position of being eager to buy any dip ahead while the stock struggles in the near-term at what has been resistance for the past 16 months in the $5 area. As always, do your own due diligence, as this is not a recommendation to buy or sell the stock.
Disclaimer: While GrowGeneration is not a client of New Cannabis Ventures, it was from January 2017 to March 2018. We disclose all public company clients here. I do not own any stocks mentioned in this article, though I may include them in one or more model portfolios at 420 Investor.