There is a brand new industry just coming of age.
New industries only come along once in a while and they almost always present an array of investments that will be superstars of tomorrow. We dream of going back in time and buying Microsoft (MSFT) or Starbucks (SBUX) or Netflix (NFLX) when they were new, upstart companies. But we might get another bite of a similar apple in 2020.
Cabot Dividend Investor 1219
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A Great Way to Play the Growing Marijuana Industry
We are standing on the precipice of a New Year and a new decade. In a way it’s just an arbitrary date on the calendar. But new beginnings hold great promise and are an ideal time to shake off the cobwebs and take a fresh look at things. The coming year holds special promise.There is a brand new industry just coming of age.
New industries only come along once in a while and they almost always present an array of investments that will become superstars of tomorrow. We dream of going back in time and buying Microsoft (MSFT) or Starbucks (SBUX) or Netflix (NFLX) when they were new, upstart companies. But we might get another bite of a similar apple in 2020.
This industry is marijuana. I know. It seems like a relic from your youth that’s out of place in a new hot stock sector. The stoner culture and big business seems like an odd match. But it’s no joke. It’s big business. And it promises to be one of the hottest market sectors in the New Year and beyond.
The growth in marijuana is undeniable. It is already the most used recreational drug in the world. And usage is growing like crazy. Global marijuana use has grown by 60% over the last decade and more than tenfold in the U.S. in the last 25 years. In fact, the U.S. is the marijuana capital of the world and currently accounts for anywhere from one-third to one-half of global consumption, depending on estimates.
But the industry has been born from a new trend toward legalization. It became legal throughout Canada in 2018. And the drug is now legal for medical use in 33 U.S. states and recreational use in 11 states. There is speculation about legalization nationwide at some point. But regardless of whether that happens or not, the trend toward more legalization is clear and undeniable.
Legal marijuana sales in the U.S. grew at a 32% clip in 2018. Sales are expected to rise by an average of 24% every year between now and 2025. And that’s without any further legalization. With growth like that the market for the product doubles every 3.2 years. Marijuana is a burgeoning industry in its infancy that will undoubtedly produce huge market winners in 2020 and beyond.
The industry is well covered at Cabot by Timothy Lutts in his Cabot Marijuana Investor advisory. Tim is a bona fide marijuana industry expert who has accrued a phenomenal track record investing in the sector since 2017. If you’re looking for great opportunities in the sector you will be very well served by subscribing to Tim’s excellent advisory.
In this issue, I will highlight an outlier in the marijuana industry. The company is actually a Real Estate Investment Trust (REIT) that takes much less risk than most of the other sector stocks and benefits from the simple fact that more marijuana will continue to be grown in the years ahead. The company is already making money and earnings continue to grow at a rapid clip. The REIT currently pays an impressive 5.43% yield. But, unlike most REITs, it also offers huge potential price appreciation and dividend growth.
What to Do Now
Going into the New Year our most promising portfolio positions are the value stocks with momentum. These include AbbVie (ABBV), Valero (VLO), Altria (MO) and, to a lesser extent, Enterprise Product Partners (EPD). These stocks offer the best of both worlds right now: a reasonable valuation and a trend to the upside.
They are cheap stocks going in the right direction.
Looking a little bit further into the New Year, I believe the 5G technology-related stocks will be strong performers. These include Crown Castle International (CCI) and the most recent addition, Qualcomm (QCOM). These stocks take advantage of a growing trend that should become a big theme in 2020.
At the same time, the REITs in the portfolio have been struggling somewhat of late. These include Crown Castle International, Community Healthcare Trust (CHCT), STAG Industrial (STAG), and Alexandria Real Estate Equities (ARE). After two years of outperformance, the REIT sector has been the worst-performing on the market for the last several months.
As the market indexes have surged in recent months it seems to have left some of the safer plays behind. At this point, I don’t view the REIT underperformance as much more than an overdue consolidation and a typical reaction to a surging market. However, I will be watching the situation and will of course keep you posted. For now I’m still holding on.
Featured Buy
Innovative Industrial Properties (IIPR)
Timing is very important.
The marijuana sector has been a wild ride. Consider the performance of ETFMG Alternative Harvest ETF (MJ), the largest cannabis ETF in the industry, investing in 38 companies. The fund was created in December 2015 and started trading at 25 per share. It had a volatile ride up to the high of 40 in September 2018. Then the price fell to less than 25 by the following December, was back up to more than 37 by March of this year, and has since fallen all the way to 17.
The biggest players in the marijuana industry, including Canopy Growth Corp. (CGC), Tilray Inc. (TLRY), Aurora Cannabis Inc. (ACB), and Cronos Group Inc. (CRON), have had spectacular rises and falls. Several of those stocks shot up between 400% and 500% in a relatively short time only to lose most of those gains in a recent downtrend.
What’s the problem?
There are several issues. For one, it isn’t uncommon for stocks of a brand new industry to experience wild ups and downs. It attracts many new and inexperienced investors in search of quick fortunes who get excited and then quickly scared. They buy when things are going well and sell in a panic when they aren’t.
But there’s something else. Marijuana was a hugely profitable drug to sell – when it was illegal. All those sissies who were afraid of jail time and confrontations with rival drug dealers stayed out of the market. Now, it seems like everybody and his pothead brother is growing it where it’s legal. The higher supply makes it less profitable and companies are struggling.
That said, marijuana is still in limited supply and in high demand overall. While the sector may not be as easy money as once thought as competition ramps up, there will no doubt be companies that are able to thrive and dominate. And the timing for the sector could be just right.
After soaring in the beginning of the year, the sector has had a huge downtrend since March. It’s generally a good idea to buy into a sector that has been characterized by wild up and down swings after a big down move.
Of course, I prefer to play it safe. I like a stock that isn’t dependent on commodity prices and doesn’t have to duke it out with companies selling the same thing. One special company benefits from the simple fact that more marijuana will continue to be grown and sold in the U.S.
Innovative Industrial Properties (IIPR) is a Real Estate Investment Trust (REIT) specializing in the acquisition and ownership of properties that grow legal marijuana for medical use in the United States. The company currently operates 42 properties in 11 states under long-term leases.
The business model is to purchase existing green houses and farms from marijuana growers, providing them with a needed cash injection, and then leasing the properties back to them. The properties are leased back under long-term contracts, currently with an average contract length of over 15 years, with triple net leases, where the operator pays for maintenance, taxes and insurance.
IIPR doesn’t grow or sell marijuana. It just charges rent to companies that do. It’s interesting to speculate on which companies will make it big. It’s an open question what form of delivery will become the most popular. It could be those vaping things, or maybe people will eat it or drink it in a popular beverage. But regardless of how it ultimately shakes out, marijuana will have to be grown. IIPR is a beneficiary of that simple fact.
How’s It Going?
Okay, that’s great. Sounds like a plan. But this REIT has been trading for three years now. What actually happened when the rubber hit the road?
IIPR started trading on December 1, 2016. Since then it has returned 317% for an average annual return of 60% (with dividends reinvested). An initial investment of $10,000 three years ago would be worth over $41,000 today. The stock price is up 60% year-to-date.
Have we missed the boat?
I don’t think so. Consider that the stock has been in a downtrend since July in sympathy with the overall sector and is trading more than 40% below the 52-week high. The numbers mentioned above would be much higher if not for a huge recent down leg. The stock now trades at just 18 times forward earnings. That’s a bargain for a stock with this much growth.
Consider that at the beginning of 2019 IIPR had just 11 properties. It now has 42 properties. In the recently reported third quarter revenues grew 201% and funds from operations were 126% higher than last year’s quarter. And there is a huge runway for future growth. It still only has 42 properties. Most REITs have hundreds of properties. This thing is still just getting started.
As I mentioned the marijuana sector has seen huge up and down swings. Many companies in the industry aren’t even making money yet. But IIPR is. You can see that fact reflected in the relative performance. Over the past year MJ, the marijuana ETF, has delivered a negative 31% return while IIPR has returned over 68%. Since IIPR’s inception it has returned over 300% while MJ has fallen 30% over the same period.
As a REIT, IIPR pays out the bulk of earnings to shareholders in the form of dividends. The current yield is a stellar 5.43%. But this dividend is mainly about the growth. As earnings rise, so will the payout. Since the first dividend in 2017, the payout has grown 420%.
IIPR has found a great way to get huge benefits from a rapidly growing industry without most of the risk and volatility of companies that grow and sell cannabis. Although there could be some volatility, this is a fantastic way to play the cannabis phenomenon. And the timing could be just right.
Innovative Industrial Properties Inc. (NYSE: IIPR)
Security type: Real Estate Investment Trust (REIT)
Industry: Cannabis
Price: $74.00
52-week range: $42.55 - $139.53
Yield: 5.4%
Profile: Innovative Industrial is a REIT that purchases marijuana producing properties from growers of legal marijuana for medical use and leases them back under long term contracts.
Positives
- Marijuana sales are expected to continue growing at a very high rate and further legalization in the U.S. is likely in the years ahead.
- The sector is cheap after a huge selloff.
- IIPR benefits from industry growth without taking on much of the risk of industry peers.
- Stock performance has been stellar and earnings continue to soar.
Risks
- Tenants take on high risk in a fiercely competitive industry in its infancy and could go bust.
- IIPR has a much higher level of volatility than other portfolio stocks.
- It is proving to be much more difficult to make money in the industry than previously anticipated.
- Growing pains and sector selloffs are likely to continue and this REIT is not immune from sector performance.
Portfolio at a Glance
Prices on December 18, 2019 at 12:20 PM ET
Portfolio Updates
High Yield Tier
The investments in our High Yield tier have been chosen for their high current payouts. These ?investments will often be riskier or have less capital appreciation potential than those in our other ?two tiers, but they’re appropriate for investors who want to generate maximum income from their? portfolios right now.
Brookfield Infrastructure Partners (BIP – yield 3.9%) – The global infrastructure company has been a strong performer. What does it actually do? In the company’s own words it owns “critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers and data.” These crucial assets provide a reliable cash flow and BIP has been able to raise the dividend every year this decade. Earnings should continue to grow as its asset rotation strategy replaces mature assets with new, higher margin properties. It’s in a defensive business in a subsector increasingly in vogue with investors. However, the stock is only rated HOLD because the price has moved up a lot lately. I will probably upgrade to a BUY on any weakness. HOLD
Community Health Trust (CHCT – yield 3.7%) – I like this smaller Healthcare REIT. It has been a superstar, returning over 60% YTD and an average annual return of over 30% per year for the last three years. It has a great niche and it’s done well. But it has gotten pricey and it can’t go up forever. That’s why two-thirds of the position has been sold in the last several months. Although the stock has pulled back somewhat from the high, it still hasn’t broken the uptrend line. For now, I will continue to hold the remaining one-third position. HOLD
Enterprise Product Partners (EPD – yield 6.4%) – After a long run of subpar performance, this energy infrastructure giant is up 12% in a little less than a month. I still believe this is one of the best dividend stocks to own right now. It’s a stellar company that has raised the dividend every year for 20 years. It has a pristine balance sheet and a low payout ratio. It has billions in new projects coming on line that should boost earnings. But the market hasn’t liked energy very much and it doesn’t seem to matter that this company is not exposed to oil prices. I believe the market will wake up eventually and this stock should be over 40 per share. In the meantime, you get 6.4% while you wait. BUY
STAG Industrial (STAG – yield 4.7%) – The industrial REIT is a low drama, steady performer that pays dividends every single month. The stock just slowly trends higher with less volatility than the overall market. It’s basically a safe stock that comes as advertised. It is a consistent performer that pays a steady income. Valuations are not out of whack but not cheap either. It’s not going to light the world on fire but sometimes slow and steady can win the race. HOLD
Dividend Growth Tier
To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.
AbbVie (ABBV – 5.4%) – The stock had paused after rising 40% from the summertime lows. But it appears to be on the move again as it is at a new recent high. I believe this is a great company with one of the best pipelines in the business at a time when the population is aging and demanding more and better healthcare. It was an aberration that the market had valued it so cheaply. But it has awoken. One of the reasons is the resurgence of Healthcare stocks. Healthcare is the best performing market sector over the past three month and one month periods. Investors have rediscovered value in the market and in the sector itself with AbbVie. The stock still sells at a cheap valuation. Momentum is good. The pipeline looks great. And the merger with Allergan (AGN) should go through early next year. BUY
Altria (MO – 6.7%) – The cigarette maker has been trending higher since the beginning of October. The stock has moved over 25% higher from the lows in early October. But the news hasn’t really gotten better. In fact, a couple of analysts recently cut the estimated valuation of E-cigarette maker JUUL in half. But it seems that a fledging JUUL, in which Altria took a 35% stake last December, is already baked into the price. If E-cigarettes fail, people will smoke more, and Altria will benefit that way. Meanwhile, the company continues to grow it bottom line and pay a massive and safe dividend. Investors seem to have realized a couple of months ago that the stock is selling at a great bargain and paying a high income despite what happens to JUUL. BUY
BUY – Crown Castle International (CCI – yield 3.6%) – This 5G cell tower REIT has moved down fairly significantly from the high in September of about $150 per share. It now selling at a more reasonable valuation of about 21 times forward earnings, which is reasonable considering the 5G growth that should take place in 2020. Analysts anticipate that this REIT will grow earnings by an average of 21% per year over the next 5 years as the company continues to experience robust and growing demand for its properties as the 5G build out continues in haste. The New Year should be very good for 5G stocks as investors awaken to the phenomenon. BUY
BUY – Qualcomm Inc. (QCOM – yield 2.8%) – 5G should be a very big deal in the New Year and Qualcomm will be one of the main beneficiaries. The company has the state-of-the-art chips for 5G smartphones and agreements with the major equipment makers, including Apple (AAPL). Rising earnings and revenues should propel the stock in the quarters ahead. In the meantime, the stock is benefitting from the thaw in the trade war with China. The announcement of a Phase 1 agreement and the fact that tensions are unlikely to escalate in an election year are helping the stock. Consider that Qualcomm expects smartphone makers to ship 450 million handsets in 2021 and 750 million in 2022. BUY
Valero Energy Corp. (VLO – yield 3.8%) – The main reason I added this refiner is because I’m optimistic about its prospects in 2020. And here we are. American refiners are still in a golden age as they have the advantage of cheaper crude oil feedstock. Valero is coming off a bad stint in a longer-term uptrend. Refiners have been one of the best-performing subsectors of the market over the past five years. Crack spreads have been improving and will likely continue to do so into 2020. Valero will also have the new IMO standard for ships that will provide another source of income. As well, it appears that the global economy is looking stronger going into the New Year, which should keep demand for refined products strong. BUY
Safe Income Tier
The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.
Alexandria Real Estate Equities (ARE – yield 2.6%) – The rating on this life science and research lab healthcare REIT was lowered from “BUY” to “HOLD” last week. Since then, the stock has moved down about 3.7%. It has been in a healthy consolidation so far as the stock had moved up very high and valuations were getting stretched. The stock was up over 40% for the year and has blown away the performance of its peers in every measurable period over the last 10 years. This is a conservative play that could continue that level of performance forever. ARE is still in favor as demand for its unique facilities remains strong and the stock is still in an uptrend. HOLD
Invesco BulletShares 2019 Corporate Bond ETF (BSCJ – yield 2.3%)
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.8%)
The Invesco BulletShares 2019 Corporate Bond ETF (BSCJ) has matured. The final day of trading was on Monday, December 16. Shareholders are scheduled to receive the final distribution of interest and principal on December 18. Meanwhile, BSCL continues to trade and will do so for another two years. For a solid yield on short-term securities it is still rated a BUY. BUY
Invesco Preferred ETF (PGX – yield 5.5%) – This preferred stock ETF is a great way to get a high yield and diversify into an asset class that is not correlated to the stock or bond markets. It is a rare way to get a good yield in a low-interest-rate world without taking on much risk. The performance has been solid and it remains a nice position to have in the late stages of the market cycle where uncertainty in the stock market continues to remain a factor. BUY
NextEra Energy (NEE – yield 2.1%) – Just when you thought this stock might be running out of gas it has another upside leg and is now trading at a new all time high. I’m sensitive about valuation and sold half the position to protect profits. The stock is fairly expensive. But I held the remaining position because it is still a highly coveted stock with upside momentum. NEE combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. It’s a huge player in the fast-growing clean energy and is the world’s largest producer of wind and solar energy. It is also shareholder friendly, targeting 12% to 15% annual dividend growth through 2024.The only kink in the armor is a high valuation. But the stock seems to want to go still higher. HOLD
Xcel Energy (XEL – yield 2.6%) – The market loves these alternative energy utilities. XEL is smaller than NEE and thus has more upside potential. It is still off the highs of early September but it has had a strong week. It also sells at a high valuation, which is why it’s only rated a HOLD. I’m not sure how high it can go. But the stock is still in an uptrend and it has more than doubled since being added to the portfolio. It still gets the benefit of the doubt. HOLD
A New Decade Awaits
Not only is a new year coming up, it’s a new decade. It’s hard to believe that it will soon be the 2020s.
If you’re like me, it feels like time is going by at warp speed. As I’ve gotten older the concept of time has taken on new properties. Somewhere along the line I boarded the express train through life – and out the window I’m seeing disturbing things whiz by.
For example, all the people I know seem to be getting old. At the same time, the people I don’t know are getting younger. Years ago, I noticed the cops started looking very young. Then doctors got younger looking. I don’t like this trend. Pretty soon the Popes will start to look young.
Anyway, calendar years break the unrelenting passage of time into bit-sized units. The cusp of a new one is a great moment to stop and take a breath, and look where we are and where we might be heading. It’s an opportunity to stop the speeding train, get off, and look around.
This has been a very good decade and a good year for the market. The S&P 500 is up 27.41% so far this year. This decade, the market has returned 241%, for an average annual return of a little over 13%. That’s a pretty good decade. But what matters now is what lies ahead.
Looking ahead to 2020, we enter in a sustained bull market. The bull market is going on its 11th year and the recovery isn’t far behind; both are much longer than historical averages. It seems like a recession and bear market must be looming somewhere on the horizon.
But bull markets don’t end just because they’re old. They usually die of excesses. But this much-slower-than-normal recovery has not led to the normal bubbles and excesses that typically accrue at this point. As well, the economy is still strong with no signs of recession in the near future. And with interest rates still at rock-bottom levels, money still has no place else to go but stocks to fetch a decent return.
It is a similar dynamic that has been in place for several years now, and the bull market has persisted. With no recession in sight at this point, there is no reason to believe the bull market won’t continue well into the New Year. Things can change, but I’m still bullish on the market in 2020.
There are also some powerful trends that may shape the New Year. The emergence of 5G technology will become pervasive in 2020. The new technologies it spawns may not be a factor until later in the decade, but it should hit the investment world hard in the New Year. As well, the marijuana industry is emerging from its infancy and should start to spawn new winners.
Looking out at the entire decade of the 2020s, it’s much tougher to predict the investment landscape. Much of it will be shaped by events that are unpredictable and haven’t happened yet. That said, there are certain megatrends that seem sure to be factors in the next decade. Those include the following.
- The aging of the population
- The spread of new technology
- The growth of the global middle class
These are trends that promise to continue well beyond the next year. Investments that benefit from such trends are likely to do well regardless of the market personality that takes shape over the next 10 years. Getting in front of these megatrends should be a good recipe for success over the longer term
There will surely be good days and bad days in the upcoming year and decade. During the bad days try to remember that the market tends to trend higher over time. One of Warren Buffett’s main ingredients for success has been that he is positive about this country. It’s something to keep in mind. A lucrative attitude to have going forward, despite the news being almost always negative, is to never bet against this country.
Happy New Year!
Dividend Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.
The next Cabot Dividend Investor issue will be published on January 8, 2020.
Cabot Wealth Network
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CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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