A Niche Group Where Small-Cap Investors Are Beating This Crummy Market

Let’s not sugarcoat it: This week was brutal on the major stock indexes, and that includes the sector indexes as well. But it has been interesting to see which sectors held up the best.

That’s what the chart below shows you. The black baseline represents the S&P 500, while the bars show you how each sector index did in comparison:

Source: StockCharts.com PerfChart of S&P Sector ETFs

It’s extremely common to see a “flight to safety” at times like these, and that’s what we’re seeing here. One big takeaway is that, in doing so, investors are seeking income.

That’s why bonds have held up okay, too, for instance. Normally, a 1.30% yield on a 10-year U.S. Treasury doesn’t feel worth your time, but people are scared of what’s going on outside U.S. borders. And at least it’s not 0.44%, like in the U.K. – or negative yields, like what Japan and most of Europe (now even Germany!) have gotten into.

However, you can get better yields from U.S. stocks…and that’s especially true in the traditional dividend sectors. Many consumer staples, telecoms, and even some big tech stocks like Microsoft (MSFT) and Intel (INTC), offer dividends. Utilities even more so.

I’ve talked before about why I like utilities (and how to pick them). But today I’d like to talk about real estate, which is also outperforming. There are some real estate investment trusts (REITs) out there with excellent business models – and many of them are small-caps, which is where we focus at Breakthrough Stocks.

If you don’t know, REITs must pay 90% of taxable earnings to shareholders. Within that group, if you’ve got a small-cap stock in the early days of its potential gain – and it scores highly in my Portfolio Grader…well, then you’ve really got that magic combination of growth and income.

A great example of these Breakthrough Stocks is Innovative Industrial Properties (IIPR). This particular REIT invests in medical cannabis properties, and shares are still up 20% for the year-to-date, even after the market downturn:

Most important, however, are the factors you don’t see on IIPR’s stock chart.

For one, the company turned in fantastic growth in Thursday’s earnings report, even better than Wall Street analysts had anticipated.  For fiscal year 2019, Innovative Industrial Properties reported total revenue of $44.7 million, or a 202% year-over-year increase. Full-year earnings surged 170.7% year-over-year to $2.03, which also beat forecasts for earnings of $1.76 per share. In the fourth quarter, IIPR’s growth was even better: 269% revenue growth and 311% earnings growth, year-over-year!

Now, with REITs, a lot of people like to look at their funds from operations (FFO). Basically, when you look at a company’s cash flow – which is where dividends come from – and add in the depreciation – which for property owners like REITs, can be quite high – then you get a sense of what it can pay out to shareholders.

Well, in 2019, IIPR’s adjusted FFO soared 259% year-over-year to $34.9 million, or $3.27 per share. At current price levels, that would be a 3.59% yield (roughly three times the 10-year Treasury yield!)

I should also note that IIPR had a strong history of positive earnings surprises even prior to the latest report, as well as upward revisions in analyst estimates:

IIPR is a good example, but it’s far from the only one. Another small-cap REIT that also just turned in an earnings beat (of 19.5%) is Community Healthcare Trust (CHCT).

CHCT is still holding up well, too, with a 10% year-to-date gain. Its real estate portfolio is in healthcare, as the name suggests – specifically, in outpatient services. And it’s among my Top 5 Breakthrough Stocks now. (In fact, I give you my #1 pick in the free recording of Wednesday’s Breakthrough Stocks Summit, so be sure to check it out if you haven’t already.)

Those physician clinics and medical offices might actually play a key role in dealing with the COVID-19 coronavirus, as it turns out. On that topic, I do want to note that, while the snowballing number of coronavirus cases is concerning and the 2,800 deaths are tragic, there are actually more of them with the seasonal flu. We’ll just have to prepare for it the same way we do with the flu, especially once a vaccine is developed.

And, once this coronavirus is contained, I still fully expect bullish trends (both seasonal and economic) to come back into play.

In the meantime, even if the market continues lower, that would be a good opportunity to pick up my #1 Breakthrough Stock on a dip back below my buy limit. Click to hear me tell you not just about this stock, but the strategy behind the best buys of my career, at the Breakthrough Stocks Summit.

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