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The markets have been extremely volatile lately and bad news and reduced expectations regarding the coronavirus extend o a wide range of companies that wouldn’t appear to have direct exposure.
Investors are increasingly coming to the realization that nearly every industry relies in international trade for the sale of finished products or in its supply chain (or both.)
With stocks broadly down more than 10% over the past two weeks, the Board of the US Federal Reserve took the unusual – but not unexpected – step of lowering the Fed Funds target rate by 50 basis points on Tuesday morning with the intent of cushioning the blow to the US economy from the impact of the virus.
Innovative industrial Properties is in the fairly unique position of operating entirely inside the United States and should also get a boost from falling interest rates. After yet another blowout quarterly earnings report, upward analyst revisions have earned the company a Zacks Rank #1 (Strong Buy).
IIPR is a Real Estate Investment Trust that invests exclusively in real property assets that are used for the cultivation and production of cannabis products. The core of their business is that they purchase properties from growers or producers, perform tenant improvements to maximize utility to the operators and execute a leaseback agreement in which the producers continue to operate their businesses while paying rent to IIPR.
IIPR has become the hands-down industry expert in navigating the complex patchwork of state and local regulations pertaining to marijuana facilities.
As a REIT, the company pays out at least 90% of operating income each year in the form of a cash dividend. As IIPR has continued to add assets to its portfolio, that dividend has been rising steadily and the current yield is better than 4% annually.
Marijuana is now legal in some form in 33 states, but remains prohibited at the federal level - which leaves operators significantly underserved by the traditional banking system. With most banks and other financial institutions unwilling to take the risk of lending to marijuana businesses, IIPR essentially fills that lending role, allowing producers to turn their real estate assets into cash for expanding operations.
As the nation’s de facto lender to the cannabis industry, IIPR enjoys very favorable lease terms on the properties it owns. The average term is 15.6 years and the average return on invested capital is 13.3% - both considerably better than industry averages.
In 2019, the US House of Representatives passed the SAFE Banking Act - a piece of bipartisan legislation that would remove the threat of penalties for financial institutions that do business with cannabis businesses. The Act was heralded as a big step forward for improving the efficiency of transactions in the industry, reducing the incidence of violent crime associated with all-cash businesses, allowing traditional banks to earn banking fees and profits from cannabis businesses and streamlining the collection of taxes and fees by state and local governments.
Unfortunately for the cannabis industry, the SAFE Act appears to be completely stalled in the US Senate and majority leader Mitch McConnell (R, KY) has demonstrated no intention of opening the issue to a vote.
Ironically, that’s actually good news for Innovative Industrial Properties. The fact that traditional lending institutions still can’t provide financing to cannabis companies means that IIPR is effectively the only game in town - and allows them to continue adding property assets on favorable terms.
While most industry observers expect that the rules prohibiting cannabis at the federal level will eventually be eased, it now appears that it’s going to take until at least the end of 2020 – and possibly much longer. In the meantime, IIPR is amassing a huge portfolio of high performing assets. Over the past 14 months, they’ve gone from 11 properties to 51.
Although most of the industry is desperately hoping for an ease in restrictions, these restrictions work in IIPR’s favor, letting them build a seemingly insurmountable head start over the potential competition.
As for the impact of the coronavirus, not only does IIPR avoid all of the common issues regarding trade and travel, the Fed’s recent emergency rate cut works in their favor as well. Because they are required to pay out a fixed percentage of cash flows, REITs generally exhibit price behavior similar to bonds. As interest rates fall, bond prices and REIT share prices increase to reflect the relative attractiveness of their cash distributions in the future.
In simple terms, with the annual yield on 10-year US Treasury notes dipping below 1%, IIPR’s 4% dividend looks more and more attractive. Even if shares were to rally 33%, the current $1/quarter dividend would represent an annual yield of more than three times the rate paid on government bonds.
A lot of attention has been paid lately to ways to avoid losses – or even generate profit opportunities – from the reaction to the spread of the coronavirus. Because of its naturally defensive nature, Innovative Industrial Properties looks to be able to sidestep most of the problems and even benefit from the trend in interest rates.
Discount retailer Big Lots recently released Q4 earnings and the results were…well…a BIG disappointment. During what is usually the best quarter of the year, the company posted profits of $2.39/share, missing the Zacks Consensus Estimate of $2.53/share and nearly 11% below the year-ago quarter
Big Lots shares tumbled more than 25% after the release and haven’t recovered since.
In addition to the earnings miss, Big Lots management explained that they, “expect a challenging first quarter of 2020, due in part to upfront investments in higher-return growth initiatives, combined with a slow start to the quarter and the sales impact of supply chain disruption related to the coronavirus.”
At this point nobody knows for sure how long the coronavirus outbreak will last or how severe it will get, but the worst-case economic scenario involves significant layoffs as American consumers curtail discretionary purchases and hunker down in their homes. In that situation, lower income consumers are likely to be hit first and hardest by any protracted slowdown – and that’s Big Lots’ bread-and-butter customer.
Many companies have issued warnings and revised or rescinded guidance based on the uncertainty that the spread of the virus is causing to Q1 results, but in many cases, analysts have tempered their reactions on the premise that if the disruption is temporary, lost sales will be made up fairly quickly once the outbreak is safely under control.
In the case of Big Lots however, the combination of sales that were already slowing with fresh virus-related warnings have the investment community slashing estimates well out into the future. All those downward revisions earn Big Lots a Zacks Rank #5 (Strong Sell).
It’s not just the number of downward revisions for Big Lots that’s alarming, but also the magnitude of those revisions.
The Zacks Consensus Estimate for net earnings for the full year are down 21% and have dropped more than 27% for next year. They’re even worse in the short term. Estimates for the current quarter are down 58% and next quarter has been slashed by 65%. Those are huge cuts.
Some investors might see a juicy 7% annual dividend yield and decide that it might be worth the risk to pick up Big Lots shares on the cheap and collect dividends until the economic picture improves. Be careful. In general, stocks that pay an attractive dividend yield because the dividend is increasing often see the share price rise until the yield matches market rates.
On the other hand, a big yield in a stock who’s share price has been falling is often a red flag.
Over the past three years, the S&P 500 has added 34%, while Big lots shares have lost 67%. Suddenly those quarterly dividend checks start to look awfully puny.
With all the recent volatility, it’s more important than ever to make careful investment choices. Owning shares in an underperforming company that has the potential to get squeezed even harder by external events could be a disastrous mistake.
Additional content:
3 Safe ETFs for Volatile Markets
Global stocks recorded their worst decline since the financial crisis, last week. US stocks lost about $3.6 trillion in market value as investors sold risky assets and piled into safe haven assets.
Gold surged to its highest level in seven years, and 10-year Treasury yield dropped to a record low. After an impressive rebound yesterday, stocks are down today again as investors continue to worry whether the virus would have a temporary impact on the global economy, or result in a deep downturn.
The iShares 7-10 Year Treasury Bond ETF provides exposure to intermediate-term US Treasury bonds.
The SPDR Gold MiniShares Trust represents about 1/100th of an ounce of gold. It is a cheaper version of the ultra-popular SPDR Gold Shares ETF.
The Amplify BlackSwan Growth & Treasury Core ETF aims to offer investors exposure to the returns of the S&P 500 while providing protection against market downturns.
Approximately 90% of the ETF is invested in US Treasury securities, and 10% is invested in S&P 500 LEAP in-the-money call options.
The LEAP options provide participation in approximately 70% of the S&P 500’s upside. They could lose all of their value if the S&P 500 falls 10% or more. However, during market downturns, US Treasuries usually act as a buffer and may even increase in value due to investors’ preference for “safe” assets.
To learn more about these ETFs, please watch the short video above.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Innovative industrial Properties, Big Lots, IEF, GLDM and SWAN highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – March 4, 2020 – Zacks Equity Research Shares of Innovative industrial Properties (IIPR - Free Report) as the Bull of the Day, Big Lots (BIG - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on (IEF - Free Report) , GLDM and (SWAN - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
The markets have been extremely volatile lately and bad news and reduced expectations regarding the coronavirus extend o a wide range of companies that wouldn’t appear to have direct exposure.
Investors are increasingly coming to the realization that nearly every industry relies in international trade for the sale of finished products or in its supply chain (or both.)
With stocks broadly down more than 10% over the past two weeks, the Board of the US Federal Reserve took the unusual – but not unexpected – step of lowering the Fed Funds target rate by 50 basis points on Tuesday morning with the intent of cushioning the blow to the US economy from the impact of the virus.
Innovative industrial Properties is in the fairly unique position of operating entirely inside the United States and should also get a boost from falling interest rates. After yet another blowout quarterly earnings report, upward analyst revisions have earned the company a Zacks Rank #1 (Strong Buy).
IIPR is a Real Estate Investment Trust that invests exclusively in real property assets that are used for the cultivation and production of cannabis products. The core of their business is that they purchase properties from growers or producers, perform tenant improvements to maximize utility to the operators and execute a leaseback agreement in which the producers continue to operate their businesses while paying rent to IIPR.
IIPR has become the hands-down industry expert in navigating the complex patchwork of state and local regulations pertaining to marijuana facilities.
As a REIT, the company pays out at least 90% of operating income each year in the form of a cash dividend. As IIPR has continued to add assets to its portfolio, that dividend has been rising steadily and the current yield is better than 4% annually.
Marijuana is now legal in some form in 33 states, but remains prohibited at the federal level - which leaves operators significantly underserved by the traditional banking system. With most banks and other financial institutions unwilling to take the risk of lending to marijuana businesses, IIPR essentially fills that lending role, allowing producers to turn their real estate assets into cash for expanding operations.
As the nation’s de facto lender to the cannabis industry, IIPR enjoys very favorable lease terms on the properties it owns. The average term is 15.6 years and the average return on invested capital is 13.3% - both considerably better than industry averages.
In 2019, the US House of Representatives passed the SAFE Banking Act - a piece of bipartisan legislation that would remove the threat of penalties for financial institutions that do business with cannabis businesses. The Act was heralded as a big step forward for improving the efficiency of transactions in the industry, reducing the incidence of violent crime associated with all-cash businesses, allowing traditional banks to earn banking fees and profits from cannabis businesses and streamlining the collection of taxes and fees by state and local governments.
Unfortunately for the cannabis industry, the SAFE Act appears to be completely stalled in the US Senate and majority leader Mitch McConnell (R, KY) has demonstrated no intention of opening the issue to a vote.
Ironically, that’s actually good news for Innovative Industrial Properties. The fact that traditional lending institutions still can’t provide financing to cannabis companies means that IIPR is effectively the only game in town - and allows them to continue adding property assets on favorable terms.
While most industry observers expect that the rules prohibiting cannabis at the federal level will eventually be eased, it now appears that it’s going to take until at least the end of 2020 – and possibly much longer. In the meantime, IIPR is amassing a huge portfolio of high performing assets. Over the past 14 months, they’ve gone from 11 properties to 51.
Although most of the industry is desperately hoping for an ease in restrictions, these restrictions work in IIPR’s favor, letting them build a seemingly insurmountable head start over the potential competition.
As for the impact of the coronavirus, not only does IIPR avoid all of the common issues regarding trade and travel, the Fed’s recent emergency rate cut works in their favor as well. Because they are required to pay out a fixed percentage of cash flows, REITs generally exhibit price behavior similar to bonds. As interest rates fall, bond prices and REIT share prices increase to reflect the relative attractiveness of their cash distributions in the future.
In simple terms, with the annual yield on 10-year US Treasury notes dipping below 1%, IIPR’s 4% dividend looks more and more attractive. Even if shares were to rally 33%, the current $1/quarter dividend would represent an annual yield of more than three times the rate paid on government bonds.
A lot of attention has been paid lately to ways to avoid losses – or even generate profit opportunities – from the reaction to the spread of the coronavirus. Because of its naturally defensive nature, Innovative Industrial Properties looks to be able to sidestep most of the problems and even benefit from the trend in interest rates.
Bear of the Day:
Discount retailer Big Lots recently released Q4 earnings and the results were…well…a BIG disappointment. During what is usually the best quarter of the year, the company posted profits of $2.39/share, missing the Zacks Consensus Estimate of $2.53/share and nearly 11% below the year-ago quarter
Big Lots shares tumbled more than 25% after the release and haven’t recovered since.
In addition to the earnings miss, Big Lots management explained that they, “expect a challenging first quarter of 2020, due in part to upfront investments in higher-return growth initiatives, combined with a slow start to the quarter and the sales impact of supply chain disruption related to the coronavirus.”
At this point nobody knows for sure how long the coronavirus outbreak will last or how severe it will get, but the worst-case economic scenario involves significant layoffs as American consumers curtail discretionary purchases and hunker down in their homes. In that situation, lower income consumers are likely to be hit first and hardest by any protracted slowdown – and that’s Big Lots’ bread-and-butter customer.
Many companies have issued warnings and revised or rescinded guidance based on the uncertainty that the spread of the virus is causing to Q1 results, but in many cases, analysts have tempered their reactions on the premise that if the disruption is temporary, lost sales will be made up fairly quickly once the outbreak is safely under control.
In the case of Big Lots however, the combination of sales that were already slowing with fresh virus-related warnings have the investment community slashing estimates well out into the future. All those downward revisions earn Big Lots a Zacks Rank #5 (Strong Sell).
It’s not just the number of downward revisions for Big Lots that’s alarming, but also the magnitude of those revisions.
The Zacks Consensus Estimate for net earnings for the full year are down 21% and have dropped more than 27% for next year. They’re even worse in the short term. Estimates for the current quarter are down 58% and next quarter has been slashed by 65%. Those are huge cuts.
Some investors might see a juicy 7% annual dividend yield and decide that it might be worth the risk to pick up Big Lots shares on the cheap and collect dividends until the economic picture improves. Be careful. In general, stocks that pay an attractive dividend yield because the dividend is increasing often see the share price rise until the yield matches market rates.
On the other hand, a big yield in a stock who’s share price has been falling is often a red flag.
Over the past three years, the S&P 500 has added 34%, while Big lots shares have lost 67%. Suddenly those quarterly dividend checks start to look awfully puny.
With all the recent volatility, it’s more important than ever to make careful investment choices. Owning shares in an underperforming company that has the potential to get squeezed even harder by external events could be a disastrous mistake.
Additional content:
3 Safe ETFs for Volatile Markets
Global stocks recorded their worst decline since the financial crisis, last week. US stocks lost about $3.6 trillion in market value as investors sold risky assets and piled into safe haven assets.
Gold surged to its highest level in seven years, and 10-year Treasury yield dropped to a record low. After an impressive rebound yesterday, stocks are down today again as investors continue to worry whether the virus would have a temporary impact on the global economy, or result in a deep downturn.
The iShares 7-10 Year Treasury Bond ETF provides exposure to intermediate-term US Treasury bonds.
The SPDR Gold MiniShares Trust represents about 1/100th of an ounce of gold. It is a cheaper version of the ultra-popular SPDR Gold Shares ETF.
The Amplify BlackSwan Growth & Treasury Core ETF aims to offer investors exposure to the returns of the S&P 500 while providing protection against market downturns.
Approximately 90% of the ETF is invested in US Treasury securities, and 10% is invested in S&P 500 LEAP in-the-money call options.
The LEAP options provide participation in approximately 70% of the S&P 500’s upside. They could lose all of their value if the S&P 500 falls 10% or more. However, during market downturns, US Treasuries usually act as a buffer and may even increase in value due to investors’ preference for “safe” assets.
To learn more about these ETFs, please watch the short video above.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.