Spring has come

The best season of the year in our area, Spring, has finally come. This year’s spring is especially welcome as we have gone through one of the worst winters in the North East. Cannot believe we were just hit by the worst snow storm a few weeks ago. The spring has not only brings the warmness, it has also makes our surroundings more colorful and beautiful. We literally live with natural paintings that are changing everyday now. Let me again brag first with a few photos from our bay view windows of both sides of our house here.

 

Even from the top glass panel of our front door, it is just like an oil painting of the Spring, isn’t? I enjoy the great colorful views every day from our house JJJ

 

Ok enough showings. What is also associated with the Spring season? If you live in a house with a yard, you must know an increasing gardening work is coming, regardless if you do it yourself or contract it out. Even without a yard, many people will love to plant flowers that is also largely started with Spring. That’s why I’d like to talk about an idea related to gardening. I’m sure anyone who has done some gardening work must know Scotts Miracle-Gro (SMG), a leading lawn and gardening company that has produced gardening products widely used in the US and in many other countries. If you have a lawn to maintain or love doing planting work, just check to see if you have bought Miracle-Gro products. I bet many of you do. That’s why when the spring comes, I cannot help but think about Scotts when I see the bags of fertilizer I have bought for our lawn that can also suppress weeds. Scotts has enjoyed many years of stable growth and its stock hit all time high at $110 late last year. But it crashed to $90ish due to missing the earnings expectations in Jan and again dropped to below $80 following the latest earnings report on May 1. In total it has been haircut by over 25% from its peak. In addition to the earnings weakness, Scotts' largest acquisition to date, $450 million for Sunlight Supply that is expected to close June 1 has also caused some concern on its increasing debt load. All in all, Scotts is in a downtrend at the moment. But if you know me as a contrarian investor, I like such kind of moments for those great companies in a temporary setback. I believe SMG is one of such stocks. On one hand, Scotts is still the leading company in the traditional gardening products, which has not changed at all due to the short term earnings weakness. More importantly, I think Scotts has made a great strategic move to get into a business that is still very controversial but has a great potential in my mind. That’s the marijuana business. This is the major motivation for Scotts to buy Sunlight as the manufacturer and distributor of hydroponics equipment will fill Scotts’ own Hawthorne's "missing piece" of supply chain management, which is strategically important to the cannabis business. I know many people will turn off immediately when they hear the word of marijuana. Indeed it is still illegal at the Federal level in the US but I think it is just a matter of time the day will come that marijuana will be legalized to some extent nation-wide in the US. It probably won’t take long actually. Don’t get me wrong, I’m not a promoter of the use of marijuana at all. But as a physician, I do well understand the significant medical effect of marijuana in severe pain management as well as its unique effect in some devastating illness without much treatment options like seizure and neurotic diseases. There have been extensive clinical studies done to verify its great medical values. Most of the states have already legalized marijuana’s medical uses. Regardless if you like it or not, this a megatrend that is prevailing not only within the US but also globally. Investing in SMG is one indirect way to ride the trend.
SMG was quite expensive at its peak but now with a 25% haircut, it is priced at a reasonable valuation with a PE of 17. When you invest in a stock for long term as a business owner, you need to pay attention to its Return on Equity (ROE). This is almost equivalent to the interest you can earn from your money in the bank, the higher the better. The SMG’s ROE is extremely high, a whooping 43%. This is one strong indicator of a great business that can return well to its investors. At this price, its dividend is also quite respectful at 2.6%. Although I wish it had a much longer dividend history, SMG has just started to pay dividend in 2005 at $0.25 per year. But it has increased its annual dividend most of years since then and it was increased to $2.06 last year. This amounts to an 8 times increase in the past 13 years, i.e. over 50% annualized increase of its dividend since it started to pay dividend. I cannot say its dividend is supper safe due to its short history but I would bet it will continue to hike its dividend in the future along with its booming business. I think SMG is a good buy now!