The market’s been absorbing a one-two punch. You’ve got news of the Omicron variant.

And the Federal Reserve announced that it’ll engage in a more aggressive tapering process. Volatility has been through the roof. Many stocks are well off of their recent highs.

But if you’re a long-term investor who’s still accumulating stock, this is a gift. Short-term volatility is a long-term opportunity. After all, would you rather pay less or more for the same exact stock? Less, of course.

I’ve been personally taking advantage of this volatility by putting some serious capital to work.

Today, I want to highlight one stock I’ve been buying, with my most recent purchase happening on the first big Omicron selloff. Ready? Let’s dig in.

The business I’ll tell you about – a business I’ve been building an equity position in – is one I’m really enthusiastic about because of its unique balance between boring stability and exciting expansion potential.

One part of this business is pretty stodgy, but another part of it is very forward-thinking.

That’s right. This company has long been known as a go-to source for high-grade lawn and garden products. We’re talking lawn seed and fertilizer here. Snooze fest, right?

Well, not so fast.

First of all, there’s a lot of money to be made in selling lawn and garden products. You can make more money from dirt than you might think, as I’ll show you. Second of all, this company made a huge, and arguably under-the-radar, pivot toward cannabis in 2014. That’s right. They’ve fused traditional gardening products with hydroponics.

The company I’m talking about is Scotts Miracle-Gro Co. (SMG).

This company is, in my opinion, being ingeniously positioned for the future. This is a company that was originally founded in 1868 – we’re talking more than 150 years of history here. They’ve taken a solid but old-school foundation, then built upon that with new economy product offerings in a very synergistic fashion.

What does that mean? It means proven stable growth and the potential for explosive growth. 

Lawn and garden products? Not going anywhere. This stuff has been in demand for over 100 years. And there’s no reason to think it won’t be in demand for another 100 years. The company took that and layered the cannabis exposure on top of it after forming a new business within Scotts Miracle-Gro in 2014, called Hawthorne Gardening Company. They’ve been busy acquiring assets and building out the Hawthorne business ever since.

And the strategy has clearly been working.

Scotts Miracle-Gro was steadily growing its top line and bottom line before the formation of Hawthorne. But there’s been a marked acceleration across the entire company since 2015. And I think this story is still in the early innings. The entire US cannabis industry is in its infancy.

You want growth? Check this out.

The company has nearly doubled its revenue over the last decade, from $2.8 billion in FY 2012 to $4.9 billion in FY 2021. Earnings per share sports an amazing CAGR of 20.2% over that 10-year time period, helped by a combination of margin expansion and modest buybacks. Of course, this kind of bottom-line growth should translate to great dividend growth. Indeed, it has.

Scotts Miracle-Gro has increased its dividend for 12 consecutive years. 

The 10-year dividend growth rate is 12.3%. That double-digit dividend growth rate is impressive, although it’s trailed bottom-line growth over the same time frame. This has created a situation where the payout ratio has actually compressed, unlike quite a few other companies out there that have expanded their payout ratios. The payout ratio is currently at only 30.3%, based on midpoint guidance for this fiscal year’s adjusted EPS. That leaves a lot of room for a lot of sizable dividend raises in the future. And the stock even yields a respectable 1.7% here.

This isn’t an income play. Instead, it’s more of a long-term compounder.

And what a compounder it’s been. This stock has compounded at an annual rate of 17.2% over the last 10 years. That would have turned a single $1,000 investment into almost $5,000 today. You’ve almost quintupled your money – and they only got into hydroponics a few years ago. Imagine what the next decade or two will result in!

The company, from just about every angle, is fundamentally great. 

The firm has averaged annual net margin of 9.3% and annual return on equity of 49.0% over the last five years. Net margin before 2016 was routinely in the mid-single-digit range. It’s essentially doubled. The balance sheet is sound. Their long-term debt/equity ratio is 2.2, but that looks high mostly because of low common equity rather than a high absolute debt load. The interest coverage ratio of over 9 indicates no issues whatsoever with covering interest costs, and that’s even after making a lot of acquisitions lately to build out Hawthorne.

I’ve built up a small position in this company, with my most recent purchase coming on December 2nd.

I added to my position at $140.36/share on that day, which just so happened to be the day when the market fell hard on an initial reaction to the Omicron variant. And I alerted my Patrons over at Patreon to that transaction in real-time. The stock is up almost 10% since my purchase, but I still think this is a compelling long-term idea. In fact, I initiated my position in the mid-$150/share area.

Keep in mind, this was over $250/share in the spring. It’s dropped by $100/share!

It’s down nearly 40% from its 52-week high. Now, paying over $250/share for Scotts Miracle-Gro doesn’t strike me as a great idea. So I don’t know who in their right mind was bidding the stock up so high and was buying it way up there. Certainly not me.

But down here in the $150/share range, I see it as reasonably valued.

That’s especially after factoring in the recent buildout of the Hawthorne business, which has the potential to be a big growth engine for the entire company. Consider that the P/S ratio is 1.8 here. Its five-year average is 1.9. So the sales multiple is actually lower than its five-year average. The last five years contained a lot of time in which Scotts Miracle-Gro was still largely an old-school lawn and garden company.

The go-forward picture is totally different, yet the sales multiple doesn’t seem to reflect that.

And then you have the forward P/E ratio at only 18.0, based on midpoint adjusted EPS guidance for this fiscal year. Even without the hydroponics stuff, that wouldn’t be a terribly high multiple for a great, if stodgy, consumer products company. There’s an argument to be made here that the Hawthorne business – and its associated upside potential – is basically free at this valuation.

Although the stock is up quite a bit since my last buy, I see myself accumulating more in the near term.

It’s a great business that’s taken a solid foundation and added something with a lot more growth potential to it. With a reasonable valuation and great fundamentals, I think this company will continue to compound at a high rate and grow its dividend aggressively over the coming years.

-Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

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