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The cannabis sector has been rallying like crazy! It is now up year-to-date but slightly behind the S&P 500’s gain of 15.9%. The NCV Global Cannabis Sector Index has gained 14.4% in 2023 thus far, though it is still down from where it was a year ago:
The driver of the investor interest has been the potential move of cannabis to a Schedule 3 drug, which could help achieve a majorly positive ending of the 280E taxation. We discussed this two weeks ago, suggesting that cannabis stocks may be escaping from hell. Last week, we warned that the MSOs have gotten riskier, as the prices have risen substantially and the DEA move is not a done deal. This week, the rally was aided by news that the Senate will be voting on SAFE Banking.
A part of the market that is still down year-to-date and that hasn’t bounced significantly is the Real Estate Investment Trusts (REITs). There are four that I track, and here is their performance in 2023:
Innovative Industrial Properties was the first REIT to go public, and it trades on the NYSE. AFC Gamma and Chicago Atlantic are more recent additions to the market and trade on the NASDAQ. They are both mortgage REITs with very high dividend yields. NewLake Capital appears very cheap, but it trades on the OTC, which limits a number of investors from owning it. It is an equity REIT, like IIPR.
These stocks seem cheap. I include Chicago Atlantic in my model portfolio at 420 Investor after buying it this week, and it trades near tangible book value. NewLake trades considerably below tangible book value. Investors have been concerned that tenants could quit paying rent or making payments on their mortgages.
We concluded two weeks ago that if 280E goes away, it could be very positive for ancillaries, like these REITs, though they don’t pay the tax. Our view is that their customers will benefit, and investors will find them less risky with better customers. Chasing MSOs may work out, but it may not as well. It seems safer to buy what hasn’t really rallied much, the REITs.
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