Welcome back! I am going to blast out a few paragraphs about a recent podcast concerning Scotts Miracle-Gro.
I wrote some about Scotts Miracle-Gro (“SMG”) in a recent update: Fun Fund: Q3 2021: The Trident of Destiny. As I mentioned in that post, I recently added it as a position in my Fun Fund.
By the way, I’m not adding more $ to this account, so soon I will probably have to broaden the topic to Fun Funds (to include all my active stock picking activities) or else there will be nothing to discuss.
This is because I am trying to implement an ALMOST never sell strategy in the account. I am basically only allowed to sell if: 1) a stock is expensive, 2) I no longer want to own it (either business or management was not who we thought they were), AND 3) there is negative price momentum (probably a negative trailing 1 year total return).
An Aside on Dividends
I am favoring dividend paying companies in the Fun Fund account, so there will maybe be a little something to do/capital to allocate, even if I don’t sell anything. I’ve had a couple of thoughts about dividends in the context of this strategy and more generally:
The dividends are making me more comfortable standing pat or being a long-term hodlr. If I do feel a desire to react based on the price moves of a stock (high or low), I can at least toggle the DRIP button.
I’m not sure I like it enough to take the tax hit in taxable accounts, but I have plenty of tax advantaged space relative to my portfolio and income (also as a result of being poor-ish, I’m probably only looking at 15% as a tax on qualified dividends).
Another $SMG Pod
Back to SMG. In a prior post, I discussed a really good interview with SMG’s CEO that kind of got me more enthused: Fun Fund: Q4 2021. Well the host of that interview was Jon Boyar.
Boyar recently went on the Yet Another Value Podcast with Andrew Walker (I’ve been following Walker since his Whopper Investments days; he’s legit, which you probably already know if you read my blog). This was a really good interview where they went over the SMG idea in some detail. I had a few thoughts as I listened.
I agreed with their characterization of the aspects of the Scotts business. When they talked about the challenges from private label, one thing I’ve noticed is that if you think about potting soil, which is probably the basic Miracle-Gro product, you might think, “Well that’s just super simple and anyone can mix together those ingredients.” In my experience, however, when you buy the private label, often you get inferior product, like soil with wood products that haven’t been allowed to age as long. You also are a lot more likely to get rocks and trash in your bags. Scotts has this “no quibble” guarantee, so if you do get a crappy bag, they will give you your money back without a bunch of questions asked. So, some of even the most basic branded stuff they sell is arguably much better quality, just because it’s been through a longer process or screened better, that kind of stuff.
The chemical/synthetic fertilizers are basically identical, but Scotts will offer fancy options like starter fertilizer with tenacity, which has a special weed killer/preventer that you can use when seeding new grass. No one else offers that (at least in the big box stores). They can also offer more consistent prill sizes and things like that, so it’s less likely you burn your lawn.
But my overall thought on most of their lines in the consumer business is that this is a bit like a consumer focused Sherwin Williams. The materials are a very small part of the inputs, versus the labor, so buyers are less likely to worry about saving a few bucks. If you get some crappy soil or something and you have to pick out rocks and/or plastic, you definitely regret that decision. If you don’t get the nice water control Scotts soil and your plant dies after you spend hours, and lots of water, trying to grow it and keep it alive you have regret. So anyway I think it’s somewhere along that spectrum of business quality.
With respect to Hawthorne, Walker and Boyar talked about similar concerns regarding commodification. I agree with what Walker seemed to be implying, that federal legalization could allow buyers to scale more and could sort of really reduce the regulatory capture and complexity that might allow Hawthorne/the supplier to have more market power than diffuse customers. It could also allow new entrants to thrive. I am also very skeptical about lighting being a proprietary, moaty, business. I followed Cree Technologies which was once the darling of LED lighting, but now you can get lights that are nearly as good from any manufacturer.
I do love that they are using the cash flow and strength of the Scotts business to inject cash in return for convertibles in companies that they think could have big consumer brands. This CEO gets the power of consumer brands. They also know a lot about growing (and engineering) plants. Like I’ve said before, they have a bunch of grass cultivars and IP that people who are in the area value. For example, I would buy their pro vista Kentucky Blue Grass seed tomorrow if I could get it, but you can only buy it through specially licensed sod farms.
So basically, it’s a P&G for lawn and garden with a bunch of cannabis options, managed by a company who knows about growing plants and building brands in plant-related consumables.
I decided I’m maxed out in the Fun Fund (I’m going to try and increase the planned diversification, to make sure I get a big enough sample size, since I’m not going to be adding cash). I might look to buy some SMG in other accounts as we go forward.
That will depend on other opportunities. The market has been volatile lately, so who knows. I was going to write about the market more generally, and Carl Icahn’s recent interview on Bloomberg, but this post is probably long enough. So, until next time.