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February 6, 2015
This Stock's Strong Uptrend May
Blow Its Target Out of the Water
By Melvin Pasternak
Even where I live in Canada, glimpses of bare brown earth are starting to dapple white snow. It's not yet time for me to plant my garden, but that moment is not far off.
I'm not alone in my interest to grow some of my own food. Gardening ranks as one of the most popular outdoor leisure activities in North America. Additionally, the National Gardening Association reports that a well-maintained garden can help save you several hundred dollars a year in food costs.
Gardening is expanding beyond backyard plots, as community gardens and even urban apartment gardens increase in popularity.
A key beneficiary of this increasing interest in gardening is Scotts Miracle-Gro (NYSE: SMG).
The Ohio-based company was started in 1868 and is the world's largest marketer of branded lawn and garden products.
Its global consumer segment, which accounts for roughly 90% of revenue, sells such products as fertilizers, grass seed, spreaders, and plant pest and disease control products. Some of its better-known brands are Scotts, Miracle-Gro, Ortho and Roundup.
It also generates revenue through its lawn care service division, which is the No. 2 player the country and provides residential and commercial lawn, tree and shrub care, and pest control services.
In January, the company acquired Action Pest Control, one of the largest exterminators in the Midwest. Management said this is part of their strategy to grow in the $7 billion pest control market.
They also see growth opportunities in hydroponics, indoor gardening and natural/organic products. With the USDA estimating about 15% of the world's food supply is now grown in urban centers and interest in edible gardening growing, especially among millennials, the company has increased spending on natural product R&D by 15% since 2012.
While revenue growth has been minimal over the past few years, the company has ramped up profits significantly. Adjusted earnings per share (EPS) grew 39% in fiscal 2013 and another 18% in the year ended Sept. 30, 2014.
This strong earnings performance allowed Scotts to issue a special dividend of $2 a share in August and initiate a $500 million share buyback program. Its regular quarterly dividend of $0.45 presents shareholders with a 2.7% forward annual yield.
This week, Scotts reported a greater-than-expected loss for its fiscal first quarter of $1.13 per share. But management said this is typically their least-important quarter, accounting for less than 10% of full-year revenue and just 5% of consumer purchases.
Shares are up more than 5% this week, as management issued fiscal 2015 earnings guidance that was above expectations.
Turning to the chart, SMG recently found support and resistance near round numbers
Shares bottomed near $40 in April 2013. From there, they moved almost in a straight line to $60 by the end of the year with brief periods of consolidation, the longest no more than six weeks.
SMG then hesitated, pulling back to support near $52.50 in February 2014. It made another run at the old $60 high, breaking through marginally but again meeting selling pressure. By late July, shares had pulled back close to round number support at $50. It is from this level that the current intermediate uptrend line can be drawn.
From here, SMG again approached $60 resistance, retreated to support, and tested resistance for the fourth time in October. The stock finally cleared this level in November, making it support. And as the bottom shadows of four different candles formed in the November-to-January period show, this level held on each subsequent retest.
In the past several weeks, SMG formed a small rectangle with support near $60 and resistance just above $62.50. This week, shares decisively cleared that resistance, pushing into the mid-$60s.
SMG spent most of 2014 in a narrow, clearly defined $10 trading range with round number support at $50 and resistance at $60. The measuring principle can be used to project a minimum target of $70 by adding the height of the consolidation to the breakout level.
However, I think shares have a good chance of exceeding this minimum target. The last time SMG had a strong directional move, the stock advanced $20 from $40 to $60. I suspect a similar pattern will unfold this time around. To be conservative, I am setting a target of $74.89, which still provides us with a double-digit return.
Recommended Trade Setup:
-- Buy SMG at the market price
-- Set stop-loss at $59.79
-- Set price target at $74.89 for a potential 12% gain by mid-2015
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