Carey set a price target of $180 a share for Scotts Miracle-Gro and said the stock is “flashing green” as a buying opportunity. The stock has dropped 30.3% in 2021, compared with a rise of 22.3% by the S&P 500 index.
SPX,
+1.38%

“We see opportunity: a stock well off its April highs, a discount to peers, and
fundamental opportunity – leader in lawn/garden and hydroponics – still ahead,” Carey wrote in a research note.

While recent volatility in the hydroponic volatility remains an “elephant in the room”, the U.S. West coast cannabis market is working through oversupply, causing
hydroponic market turbulence against already record year-ago comps, he said.

“Strong operators can take advantage of market dislocations, and we think SMG can re-run its FY18 playbook to consolidate more share (key driver of hydroponics growth),” he wrote.

Unlike its peers, Scotts Miracle-Gro is also well established in the broader garden sector with a major presence at major retailers such as Home Depot Inc. and Lowe’s Cos. Inc.
LOW,
+0.76%,
he said.

Carey set a price target of $18 a share on GrowGeneration, which he described as “the top hydroponic retailer in N. America” with 2021 revenue growth greater than four times its level in 2019. It’s also valued at a discount to the fast-growth retail sector.

GrowGeneration shares are down about 61.8% this year, compared with a loss of 24.5% by the Cannabis ETF
THCX,
+2.39%.

“The runway looks attractive, with a strategy to increase store count +60% by end-2023; internal initiatives (e-commerce, private label); and continued momentum of U.S. cannabis, a key driver of hydroponic category demand,” Carey wrote.

Meanwhile, Hydrofarm Holdings, a wholesaler, distributor, and manufacturer of hydroponic equipment and supplies in North America, drew a price target of $33 a share. as a “pure play” in the space, Carey said

Hydrofarm Holdings shares are down 44.9% in 2021.

“HYFM generates all revenue and profit in hydroponics, one of few federally legal ways to play secular U.S. cannabis growth — that’s a long-term positive,” he wrote. “However, during bouts of market volatility, as is happening now on
the U.S. west coast, this means HYFM is exposed. “

Cannabis retailer and manufacturer Canopy Growth Corp drew an $8 price target.

Carey said the stock “still looks overvalued” despite its roughly 59% slide this year.

“We think it’ll be tough to hit ‘breakeven’ revenue near-term barring a change in U.S. federal cannabis laws, and are below consensus,” he wrote.

U.S. exports climbed 8.1% to $223.6 billion

Imports edged up less than 1% to $290.7 billion in October.

Big picture: The steep drop in the October trade gap from a record high just one-month earlier is likely a one-off.

The surge in exports won’t be sustained and persistent delays at U.S. ports in unloading waiting ships have curbed imports. Those problems will eventually clear up.

Throughout the pandemic, the U.S. has been running unusually high deficits. Americans have been buying lots of foreign-made goods amid a strong economic revival, but other countries have been slower to recover and that’s reduced their appetite for American-made goods.

Read: Jekyll-and-Hyde U.S. jobs report not as ugly as it looks

Market reaction: The Dow Jones Industrial Average
DJIA,
+1.87%
and S&P500
SPX,
+1.17%
were set to open higher in Tuesday trades.

This is why David Dineen, the chief investment officer for global small-cap at Spouting Rock Asset Management, believes that three large auto-dealer chains are well-positioned for stock-price gains in 2022 and beyond.

“We are coming off trough sales for this economic cycle” for new cars, he said during an interview.

Spouting Rock Asset Management is based in Bryn Mawr, Penn., and has $3.1 billion in assets under management.

The supply shortage has led to a decline in sales of new cars and light trucks to a seasonally adjusted annualized rate (SAAR) of 14.4 million units in October from a SAAR of 18. 8 million in April, according to the Bureau of Economic Analysis.

Dineen described the October SAAR as “a recessionary level,” underscoring an opportunity for investors, because the auto dealers trade at lower valuations than auto manufacturers and parts suppliers.

Bad ‘comps’ for many industries in 2022

When covering financial results, Wall Street analysts and the financial media are fixated on year-over-year comparisons because of seasonality. But those “comps” can paint a confusing picture. For example, an industry whose sales dropped during the early days of the coronavirus pandemic in the first quarter of 2020 might have shown stellar “improvement” a year later, even if its sales hadn’t come close to recovering to pre-pandemic levels.

Artificially high year-over-year increases in sales, profits or cash flow this year may be followed by much slower growth rates as business in various industries gets closer to pre-pandemic norms.

According to Dineen, “you will have difficult comps for much of consumption in 2022.”

And that’s why he thinks large dealers who sell new cars are a good place for investors who wish to make another pandemic rebound play.

Low valuations for auto dealers

The auto dealers as a group have suffered a “re-rating” by investors as the shortage of new cars has caused sales to tumble, while creating upward price pressure and shortages of used cars.

To illustrate how this has affected stock valuations relative to earnings, we looked at the six auto dealers included in the S&P 1500 Composite Index
SP1500,
+1.25%
(made up of the S&P 500
SPX,
+1.17%,
the S&P 400 Mid Cap Index
MID,
+1.99%
and the S&P Small Cap Index
SML,
+2.41%
). Here’s how forward price-to-earnings ratios for the six car dealers have moved since the end of 2019:

The forward P/E ratios are based on rolling 12-month earnings estimates among analysts polled by FactSet. Click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

The exception to downward P/E movement for these dealers has been CarMax Inc.
KMX,
+1.28%.

“CarMax has had the most leverage to the used car market, which has been on fire,” Dineen said. The five other dealers on the chart sell both new and used vehicles. Looking ahead over the next two years, as the supply chain presumably recovers and new-car production rebounds, he favors AutoNation Inc.
AN,
+0.43%,
Asbury Automotive Inc.
ABG,
+4.44%,
and Sonic Automotive Inc.
SAH,
+5.31%
for an increase in P/E ratios and share prices.

For CarMax, comparisons may get “slippery” over the next two years, if a return to 2019 or 2020 sales levels for new cars causes the used-car market to cool, Dineen said.

Here’s an easier way to compare current forward P/E ratios for the six dealers in the Composite 1500 to their pre-pandemic levels. The list is sorted by market capitalization:

In contrast to the three dealers he favors (AutoNation, Asbury and Sonic), Dineen pointed out that Ford Motor Co.
F,
+0.42%
trades at a forward P/E of 9.8, while General Motors Co.
GM,
+0.22%
trades at a forward P/E of 8.7. Meanwhile, auto-parts retailers trade much higher, with O’Reilly Automotive Inc.
ORLY,
+0.34%
at a forward P/E of 21.6, AutoZone Inc.
AZO,
+0.91%
at 18.3 and Advance Auto Parts Inc.
AAP,
+1.39%
at 17.4.

Read: AutoZone stock jumps after big profit beat and sales that rose above forecasts, while gross margins decline

Wall Street’s view

Here are expected compound annual growth rates (CAGR) for sales for the six dealers, based on consensus estimates through calendar 2023 among analysts polled by FactSet. Sales numbers are in millions.

Here’s a summary of opinion among brokerage firms’ analysts polled by FactSet:

CarMax has 61% “buy” or equivalent ratings. However, the stock is close to its target price. The analysts see high double-digit upside for all the others, even though only a third rate AutoNation a buy.

How does Tesla fit in?

When asked about the long-term viability of new-car dealers, in light of Tesla Inc.’s
TSLA,
-0.59%
non-dealer distribution model for its electric vehicles, Dineen said: “What really matters to us is valuation.”

“There is no question that Tesla is an awesome company,” he said, but he added that Tesla’s stock is “priced to win 100% of electric-vehicle sales.”

“When we look at automotive in general, we think the dealers make the most sense,” he said.

Don’t miss: Tesla’s stock is still cheap, says manager of new ETF who made Musk’s EV company its No. 1 holding

Treasury yields across the curve were edging up, with the 10-year Treasury note
TMUBMUSD10Y,
1.451%
at around 1.45%, while the U.S. dollar was up by less than 0.1% at 96.381, as gauged by the ICE U.S. Dollar Index
DXY,
+0.23%.
Richer yields can undercut appetite for non-yielding gold and a stronger greenback can make the dollar-priced commodity more expensive to overseas buyers.

Meanwhile, equities globally were headed higher, diminishing some of the appeal of precious metals, amid hopes that the omicron variant of the coronavirus will prove less damaging to the economy than feared.

Commodity strategists make the case that strong demand for commodities and healthy import and export data out of China may be helping to support buying in gold and other safe-haven assets, despite the factors that would typically serve as headwinds for prices.

“A strong rally in raw commodity sector leader crude oil early this week is supporting upside price action in the metals markets,” wrote Jim Wyckoff, senior analyst at Kitco.com, in a daily note.

March silver
SIH22,
+0.23%,
meanwhile, rose 14 cents, or 0.6%, to reach around $22.40, after declining 1% on Monday.

Investors were also taking some comfort in the People’s Bank of China’s decision on Monday to reduce the reserve requirement ratio for banks by 0.5 percentage point to 8.4%, starting Dec. 15.

Those factors combined have put some pressure on Treasury yields, but returns on government debt still remain relatively low considering that the Federal Reserve next week is likely to announce a plan for faster tapering of its monthly bond purchases to combat surging inflation.

See: Fed is widely seen backing a faster taper next week

However, Treasurys have drawn some bids because fixed-income investors have been positioning as if the Fed will make a policy mistake that hurts the economy.

The Fed’s next policy gathering is set for Dec. 14-15 and policy makers are in a media blackout period until then.

Looking ahead, investors will be watching a report on U.S. international trade at 8:30 a.m., as well as data on productivity and costs.

Meanwhile, an auction of $54 billion in 3-year notes
TMUBMUSD03M,
0.058%
is scheduled for 1 p.m. ET.

What strategists are saying

• “Treasury prices are a bit weaker on lighter flows…We continue to look for higher yields ahead of the Fed taper between now and in early 2022,” wrote Tom di Galoma, managing director of Treasurys trading at Seaport Global securities, in a daily note.

Of the major regional indexes, the German DAX
DAX,
+2.02%
surged 1.8%, the French CAC 40
PX1,
+2.25%
surged 2% and the U.K. FTSE 100
UKX,
+1.14%
added 1.1%.

Tech stocks led Tuesday’s rally, with semiconductor equipment maker ASML
ASML,
+5.60%
advancing 6%, and Aixtron
AIXA,
+4.98%
also rising 6%.

“The reasons for today’s positive tone are numerous: reduced concerns over the severity of omicron; improved confidence over China’s response to the property sector woes; and a swath of strong global macro data,” said David Rosenberg, chief economist and strategist at Rosenberg Research.

Chinese trade data and German industrial production reports helped buoy sentiment, which in large part was carried forward by optimism from Dr. Anthony Fauci that the omicron variant, so far, isn’t more harmful than other variants.

China’s decision on Monday to cut its reserve ratio for banks also helped sentiment.