GrowGeneration Growing Sales at a Double-Digit Pace

Marijuana Industry
by Rick Rouse

There are a number of ways to trade the emerging growth in the cannabis industry, but the sector certainly has its risks and rewards when considering an investment. The price swings in any particular stock can be massive based on the news cycle and which states (and countries) might, or might not, be moving in the direction of legalization.

cannabis leaf growing in nature

The facts are: cannabis is still illegal at the federal level in the United States, and the market is still relatively new. So, it is hard to decide on which stock will give you the best setup to the upside of the cannabis industry.

One company that is worth watching is GrowGeneration (GRWG), a hydroponics retailer that operates several retail locations across a dozen states. Of course, the company has longer-term goals of doing business across all of America, and around the world, but that will depend on lawmakers.

GrowGeneration had revenue of $193 million for fiscal year 2020 and is expected to grow 2021 sales to $450 million. For 2022, Wall Street estimates revenue will be between $530-$575 million.

One good sign is that the company is profitable. In its prior quarter, earnings came in at $0.11 per share, but a penny below forecasts. For the recently ended quarter, analysts have pegged profits of $0.09 per share, with the low estimate at $0.07 and the high at $0.12. The company’s next earnings release is scheduled for November 11, before the opening bell.

For fiscal year 2021, profits should come in at $0.per share, and $0.52 cents per share in 2022. Additionally, analysts expect GrowGeneration is poised for many years of double-digit revenue growth.

As far as the technical setup, shares are down from a 52-week peak of $67.75, with the low at $18.31. Key resistance is at $25.50 and the 50-day moving average remains in a downtrend. Support is at $20–$18, and levels that could be tested on a disappointing quarter.

There are eight analysts who cover the stock with three strong buy and five buy recommendations. The price targets for three of the analysts range from $53 to $67 following the company’s last earnings update in August.

The options market is pricing in a possible move of 10%–15% following the earnings news. The regular GRWG November 22 calls are currently near the $1.75 level, while the GRWG November 22 puts are trading for about $1.50. The premium for both options comes out to $3.25 if bought together and would create an option straddle.

Traders often use these types of option strategies if they are unsure of the direction a stock may trade once the news is announced. The goal is to make enough premium on one side of the trade to offset the other, in order to make a profit.

At current levels, shares would need to trade above $25.25, or below $18.75, by November 17 for the trade to at least break even. A more pronounced move above or below these levels would start making profits.

Stock traders can wait until after the announcement to decide whether GrowGeneration is a longer-term buy with continued closes above the 50-day moving average signaling a near-term bottom. If the company disappoints, or lowers guidance going forward, shares could be back in the high to mid-teens.

Author: Rick RouseRick uses “cheap” slightly out out-of-the-money call and put options. His recommendations are based on both a fundamental and technical analysis. Rick has shown how just a 5%-10% move in a stock can generate consistent 100% winners in a short time period within 2-6 weeks. He uses tight Limit Orders and Stop Limits to get his members into bullish and bearish trades while protecting profits and limiting losses. He is not a bull or a bear as he believes you can make just as much money in an up market as you can in down markets.