Here’s Why The Scotts Miracle-Gro Company (SMG) Declined in 2022

Madison Funds, managed by Madison Investment Management, released its “Madison Small Cap Fund” fourth-quarter 2022 investor letter. A copy of the same can be downloaded here. In the fourth quarter, the fund (Class Y) returned 5.66% compared to a 6.23% rise for the Russell 2000 and a 7.43% increase for the Russell 2500 Index. In 2022, the fund underperformed its benchmarks and returned -24.64%. In addition, you can check the top 5 holdings of the fund to know its best picks in 2022.

Madison Funds highlighted stocks like The Scotts Miracle-Gro Company (NYSE:SMG) in the Q4 2022 investor letter. Headquartered in Marysville, Ohio, The Scotts Miracle-Gro Company (NYSE:SMG) provides products and services for lawn, garden care, and indoor and hydroponic gardening. On January 20, 2023, The Scotts Miracle-Gro Company (NYSE:SMG) stock closed at $62.34 per share. One-month return of The Scotts Miracle-Gro Company (NYSE:SMG) was 30.69%, and its shares lost 59.28% of their value over the last 52 weeks. The Scotts Miracle-Gro Company (NYSE:SMG) has a market capitalization of $3.458 billion.

Madison Funds made the following comment about The Scotts Miracle-Gro Company (NYSE:SMG) in its Q4 2022 investor letter:

“Stock selection was the poorest for us in this sector. Two stocks in particular – Hain Celestial (HAIN) and The Scotts Miracle-Gro Company (NYSE:SMG) – while big winners for us in 2020 and 2021, hurt the portfolio in 2022.

While both companies were so-called COVID beneficiaries (businesses that benefited from consumers staying home and spending on their homes during COVID), we felt they possessed certain additional drivers that would maintain their fundamentals into 2022 and beyond.

Scott’s Miracle-Gro is arguably one of the great American franchises. The brand is synonymous with lawn care and pest control, has a dominant market share (~60%) with historically-impressive ~30% cash flow margins, and has the country’s largest Cannabis supply business. Scotts’ core business saw a significant windfall during COVID lockdowns. Lawn and garden care is not a growth business, and SMG dominance does not allow for much incremental gain in market share. However, our thesis was that even in a reopening scenario where lawn and garden businesses would revert to the mean, the cannabis market was poised for years of growth as more states legalized recreational use.

What we missed was the highly inefficient structure of the U.S. cannabis market. Currently, California, Colorado, and Michigan have the biggest and most mature markets. However, over the course of the last few years, several very large states and regions have voted to legalize recreational use, including New York, New Jersey, and Connecticut. The fly in the ointment has been Oklahoma, which is a medical marijuana state. Although recreational use is still prohibited, licenses to grow the crop were granted in Laissez Faire fashion to anyone willing to buy one. Oklahoma began to grow and cultivate the crop far in excess of their medical marijuana demand. That excess supply bled into grey markets across the country, devastating pricing for growers in other states. This glut put a near complete stop to capital spending on grow operations. With no new or incremental facilities coming on, Scotts’ Hawthorne business was cut in half from its peak in F21. This, of course, had a devastating effect on the stock.”

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The Scotts Miracle-Gro Company (NYSE:SMG) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 29 hedge fund portfolios held The Scotts Miracle-Gro Company (NYSE:SMG) at the end of the third quarter which was 25 in the previous quarter.

We discussed The Scotts Miracle-Gro Company (NYSE:SMG) in another article and shared the list of cheap pot stocks to buy. In addition, please check out our hedge fund investor letters Q4 2022 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.