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Why Hydrofarm Holdings Stock Jumped 11% Today

By Reuben Gregg Brewer - Apr 29, 2021 at 3:21PM

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After the stock dropped sharply a couple of days ago, investors seem to be reevaluating their take on Hydrofarm.

What happened

Shares of hydroponics supplier Hydrofarm Holdings (HYFM 0.00%) were higher by roughly 11% at 2:30 p.m. EDT today. It was just a couple of days ago that the stock sold off sharply on news of an acquisition. But it appears that investors are already starting to look to the future.

Now what

Very often in an acquisition situation the price of the acquiring company falls. That makes complete sense, given that it has to pay for the deal. In the case of Hydrofarm, part of the up to $78.1 million price tag (there are earn outs involved) for nutrient maker Field 16 was going to be covered by selling stock. That's another thing investors often frown upon, since stock sales are dilutive to current shareholders.   

A marijuana leaf in a shopping cart over a credit card and cash.

Image source: Getty Images.

On that front, the company announced the pricing of the stock sale after the market closed on April 28. It will be selling roughly 4.8 million shares at $59 per share, netting it $269.3 million after taking transaction expenses into account.

That's actually way more than it needs to get the Field 16 deal done and could leave the company with a war chest for future acquisitions. Which is, in fact, a basic goal here, as the company looks to "solidify our position as the acquirer of choice in this highly fragmented and fast-growing industry." Today is the second day of gains after the merger-related price decline, so perhaps investors are starting to think that the acquisition strategy has the makings of a positive long-term story.  

Now what

Hydrofarm Holdings came public in December 2020, so there is very little history for investors to evaluate here. That's not necessarily a knock on the company, but it does increase the risk given that it has started to buy other companies before it has even reported its first full quarterly update as a public company (first-quarter earnings are due to be released after the market closes on May 13). Hydrofarm Holdings' hydroponic focus, which ties into the marijuana space, is very interesting, but most long-term investors should probably wait for more financial data before getting too caught up in the story here.  

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