First, let me say that I had not heard about GrowGeneration (NASDAQ:GRWG) when my editor reached out last week asking me to write about GrowGeneration stock, so my initial opinions are just that – opinions. They are not the gospel truth. I could quickly turn out to be 100% wrong.
That said, when I read that the chief financial officer at GrowGeneration insider Michael Salaman’s last public company – Skinny Nutritional entered Chapter 11 bankruptcy proceedings in May 2013 – served three years in jail for bank fraud, the questions must follow.
I’m referring, of course, to the Aug. 21 news release from Hindenburg Research, the same people behind the Nikola (NASDAQ:NKLA) short, which is looking more accurate by the day. As I write this, Nikola’s executive chairman, Trevor Milton, has resigned his position under a dark cloud.
Hindenburg may have gotten lucky on Nikola, and GrowGeneration is much ado about nothing. But looking at the company’s cast of characters, I incline to recommend investors consider one of the countless other cannabis-related stocks currently trading on U.S. stock exchanges.
Here’s why I feel this way.
I Love to Be the Contrarian
One of my favorite investing books is Contrarian Investment Strategies: The Next Generation by David Dreman. It was the 1998 follow-up to Dreman’s 1979 classic, Contrarian Investment Strategy: The Psychology of Stock Market Success.
Dreman was early to behavioral finance and the psychology of the markets. Today, you can’t swing a dead cat without landing upon a theory about market psychology. His philosophy had less to do with being a contrarian and more about understanding the errors that most investors make.
One of those errors is following the crowd.
As I look at my InvestorPlace colleagues, I see that five articles have been written since Hindenburg’s Aug. 21 press release. Except for a single sentence from Luke Lango, the opinions are very optimistic about Grow Generation’s chances to capture a big chunk of the hydroponics and cannabis supplies market. Here’s what he wrote on Sept. 10:
“There are about 1,000 hydroponics stores in the U.S. The market is highly fragmented. There are no big brands. There’s zero consistency across markets. And online and omni-channel capabilities are limited. … Founded in 2014 in Colorado, the $690 million specialty hydroponics retail chain is trying to consolidate, optimize and modernize the cannabis supplies market, and ultimately turn into a modern, national go-to convenience store for cannabis growers. In other words, something like the Home Depot (NYSE:HD) for cannabis growing materials.”
The old consolidation play, especially in a low-interest-rate environment, is always an intriguing opportunity. However, I would be more comfortable if the company leading this charge was a Tractor Supply (NASDAQ:TSCO) spin-off or another experienced retail consolidator.
I can’t tell you whether GrowGeneration’s legal efforts to discredit Hindenburg will be successful or not. What I do know is that there are more than 4,500 stocks available to U.S investors. Focusing on one with a management team that’s got a checkered past seems like a complete waste of energy.
There are so many better options.
The Bottom Line on GrowGeneration Stock
GrowGeneration has a market capitalization of $748 million. That’s a price-to-sales ratio of 5.8. By comparison, Tractor Supply is valued at 1.7x sales.
Regardless of the true grit of the GrowGeneration management team, I have to wonder why someone would opt for a stock that’s three times as expensive when you can own TSCO, which has an annualized total return of 17.7% over the past 15 years.
Now, as I said previously, if the management team was blemish-free, you might be able to make the case that price is what you pay; value is what you get. However, the smoke circling GrowGeneration stock suggests investors might want to take their time buying into this growth story, at least until the company puts to rest the arguments from Hindenburg.
Yes, I realize it’s easy to throw out accusations, especially when you’re short a stock, but just because Hindenburg is short GRWG doesn’t make its argument wrong. The answers will come out in the wash. If and when they do, I’ll reevaluate my position.
Until then, I don’t recommend it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.